CIHM 
Microfiche 
Series 
(l\/lonographs) 


ICIMH 

Collection  de 
microfiches 
(monographies) 


Canadian  Institute  for  Historical  Microredroductions/lnstitut  canadien  de  microreproductions  historiques 


©2000 


Technical  '-m6  Bibliographic  Notes  /  Notes  techniques  et  bibliographiques 


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Encre  de  couleur  (i.e.  autre  que  bleue  ou  nc 

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I  noire) 


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Bound  with  other  material  / 
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V\ 


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Ce  document  est  film*  au  taux  de  reduction  indlqu6  ci-dessous. 


f 

2 

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26x 

30x 

/ 

1 

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1 

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3 

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par  le  premier  plat  et  en  terminant  soit  par  la 
derniere  page  qui  comporte  une  empreinte  d'im- 
pression  ou  d'illustration,  soit  par  le  second  plat, 
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aux sont  filmes  en  commengant  par  la  premiere 
page  qui  comporte  une  empreinte  d'impression  ou 
d'illustration  et  en  terminant  par  la  derniere  page 
qui  comporte  une  telle  empreinte. 

Un  des  symboles  suivants  apparaltra  sur  la 
derniere  image  de  chaque  microfiche,  selon  le  cas: 
le  symbole  -*  signifie  "A  SUIVRE",  le  symbole  V 
signifie  "FIN". 

Les  cartes,  planches,  tableaux,  etc.,  peuvent  etre 
filmes  a  des  taux  de  reduction  differents.  Lorsque 
le  document  est  trop  grand  pour  etre  reproduit  en 
un  seul  cliche,  il  est  filme  a  partir  de  Tangle 
superieur  gauche,  de  gauche  a  droite,  et  de  haut 
en  bas,  en  prenant  le  nombre  d 'images 
necessaire.   Les  diagrammes  suivants  illustrent  la 
methode. 


1 

2 

3 

4 

5 

6 

MICROCOPY   RESOLUTION   TEST   CHART 

(ANSI  and  ISO  TEST  CHART  No    2l 


1.0 


I.I 


1.25 


1^ 

140 


2.5 
2.2 


2.0 
1.8 


A     -APPLIED  IM/1GE 


165 J   East   Main   Street 

Rochester,   Ne»   York         14609       USA 

(716)    482  -  0300  -  Phone 

(716)   288  -  5983  -  Fa« 


I 


\ 


Modern  Business 

CANADIAN  EDITION 

A  SERIES  OF   EIGHTEEN    TEXTS,   ESPECIALLY  PREPARED 

FOR  THE  ALEXANDER   HAMILTON   INSTITUTE  COURSE  IN 

ACCOUNTS,  FINANCE  AND  MANAGEMENT 

EDITED  BY 

JOSEPH   FRENCH  JOHNSON 

DIAK,  WW  TORK  fNIVEIlSlTT  WH<«>I.  "F  COMMEHt-B,    *t«  Ol'NTS  *ND  rtNANCE 
NKW  YonR  CITV 

Title  Author 

APPLIED  ECONOMICS James  Mavor 

ORGANIZATION  AND  MANAGEMENT  Lee  Galloway 

SELLING R   S.  Bi  TLER 

CREDITS Lee  Galloway 

TRAFFIC S.  J.  McLean 

ADVERTISING Lee  Galloway 

BUSINESS  CORRESPONDENCE    .      .  G.  B.  Hotjhkiss 

^.,»,^,»,,.  „T,,,.r,„,„.  f  Leo  Greexdlinoer 

ACCOUNTING  PRACIKE  .  .      ■  1  ^    ,,-.  Wr.oht 

^„.^,,-.x.   r-.x- ,»./^T-  [William  H.  Louqh 

CORPORATION   FINANCE.      .     .      ■  Ured  W.  F.eld 

..^.-^,.    .x.rN  T>  i  v-T'ix'/-i  /Earl  Dean  Howard 

M0NE\   AND  BANKING     .     .     .     •  { ^y.  w.  Swanson 

BANKING  PRACTICE E.  L.  Stewart  Patterson 

^^x,^T/-,».  T^iT.,.  .v-r^f  /Franklin  Escher 

FOREIGN  EXCHANGE i  E.  L.  Stewart  Patterson 

f  Thomas  Conway 
INVESTMENT  AND  SPECULATION     J  Albert  Atwood 

I  Fred  W.  Field 

Tvm-RANCF  (Edward  R.  Hardy 

INSURANCE I  Pj^^jj  ^y    ^^^^^ 

_^.,   ^„^.__  /Walter  Lindner 

REAL  ESTATE t  E.  W.  Wright 

AUDITING Seymour  Walton 

COST  ACCOUNTS Stephen  W.  Gilman 

COMMERCIAL  LAW Walter  S.  Johnson 


Banking  Practice 


and 


Foreign  Exchange 


PART  I:  BANKING  PRINCIPLES 
PART  II :  BANKING  PRACTICE 


BY 

E.  L.  STEWART  PATTERSON 

ACTING    INSPECTOR,    TIIK   fANAOIAN    BANK   OF    COMMERCE; 

FORMERLY    ASSISTANT     <iENERAL    MANAGER 

THE    EASTERN    TOWNSHIPS    BANK 


PART  III:   FOREIGN  EXCHANGE 

BY 

FRANKLIN  ESCHER 

LECTURER    ON    FOREIGN    EXCHANGE   IN    NEW  YORK   UNI- 
VERSITY SCHOOL    OF    commer(;e.    accounts   and 

FINANCE;    EDITOR    OF    "INVESTMENTS" 

IN  CX)LLABORATION  WITH 
E.  L.  STEWART  PATTERSON 


Modern    Business 

Caniidian  Edition 

Volume  VIII 


ALEXANDER  HAMILTON  INSTHUTB 
NEW  YORK 


Hi 


COPTBIOHT,    1014.   BT 

ALEXANDER   HAMIl.TOV    INSTITUTE 

CoFTBioHT  IN  C!r»;at  Britain    IOH,  bt 
ALEXANDER  HAMILTON   INSTITUTE 


PREFACE 


It  would  be  impossible  within  the  narrow  confines  of 
one  volume  to  deal  exhaustively  with  so  extensive  a  sub- 
ject as  that  of  Canadian  banking  practice,  and  the  writer 
is  fully  conscious  of  his  limitations  in  this  and  other 
respects.  It  is  hoped,  however,  that  the  parts  of  this 
subject  dealt  with  will  be  found  to  be  treated  with  due 
regard  to  their  relative  importance,  and  that  no  really 
essential  information  has  been  overlooked.  As  far  as 
})ossibIe,  all  matters  coming  within  the  scope  of  the  Bills 
of  Plxchange  Act  have  been  purposely  omitted,  because 
an  intimate  knowledge  of  the  act  itself  is  essential  to 
every  business  man  and  banker. 

Although  Canadian  banks  may  differ  in  bookkeeping 
and  methods,  the  general  principles  and  aims  of  their 
svstems  are  the  same,  and  the  reader  should  have  no  diflR- 
culty  in  iniderstaiuling  the  forms  and  methods  explained 
in  the  text,  and  in  interpreting  them  by  his  own  experi- 
ence. Too  specific  explanations  have  been  avoided  as 
far  as  possible,  lest  the  principles  involved  should  be 
buried  under  a  mass  of  detail. 

The  regulations  governing  general  routine  and  the 
custody  of  securities  as  set  forth  in  the  iiile  books  of  the 
various  banks  are  very  similar  in  intention,  if  not  in 
wording,  and  the  sections  dealing  with  these  matters 
in  Chapter  V,  Part  II,  and  elsewhere  conform  to  the  best 
])ractice.  The  counter  forms  used  in  dealing  with  cus- 
tomers, such  as  powers  of  attorney,  pledges,  etc.,  are 


I'REFAl  K 


nlso  more  or  less  iinirdrni  and  the  examples  given  may 
l>e  eonsideved  representative. 

While  the  writer  is  alone  responsihle  for  all  views  and 
.statements,  he  is  under  ohligations  to  the  following 
gentlemen  for  valuahle  assistance:  to  Mr.  IL  M.  1*. 
Kekardt  for  reading  the  manuseript  of  part  one  and 
making  many  valuahle  suggestions;  to  Mr.  H.  O.  K. 
Asman,  and  finally  to  Mr.  K.  C.  Grundy  for  his  helpful 
reading  of  most  of  the  proofs. 

The  writing  has  been  done  at  odd  times  and  to  a  cer- 
tain extent  under  unfavorable  circumstances,  and  may 
perhaps  lack  the  symmetry  and  completeness  which 
might  have  been  attained  by  more  continuous  and  lei- 
surely work.  It  is  hoped,  however,  that  notwithstand- 
ing its  acknowledged  or  latent  defects,  it  will  prove  to 
be  of  considerable  assistance  in  the  study  of  a  subject 
the  literature  of  which  is  at  present  very  limited. 

E.  L.  Stewart  Pattehson. 

104  Admiral  Road,  Toronto. 


TABLE  OF  CONTENTS 

PART  I:  BANKING  PRINCIPLES 

CHAPTER    I 

HISTORICAL   SKETCH 

■■onoN  rAoa 

1.     Introduction         1 

S.     New  Frnnce 2 

8.     British  Oc-cupancy 8 

4.  Army  Bills S 

5.  Provincial    Bnnkinf^ 4 

6.  National  Bunking  System 6 

7.  First  Bank  Act   1871 .      .  6 


CHAPTER    II 
KINI>S   OF    BANKS 

8.  Commercial  Banks 9 

9.  Savings  Banks 11 

10.  Trust  and  Loan  Companies IS 

CHAPTER    III 
THE    BANK    ACT 

11.  Bank  Act  of  1913 15 

12.  Changes  in  the  Bank  Act 1^ 

13.  Shareholders'  Audit Iti 

14.  Abstract  of  the  Bank  Act 18 

1.5.     Title  and   Interpretations  (Sec.  l—<; 18 

16.  Application  of  the  Bank  Act  (Se(.  3—7) 18 

17.  Incorporation  of  Banks  (Sec  8—1  i; 19 

18.  Organization  of  Banks  (Sec.  l;{—17j 20 

vii 


Vlll 


CON'l'ENTS 


lECTION  JAOB 

ly.     Refusnl  of         Lificate 21 

20.  By-L  vs   f Section   18) 21 

21.  Board  of  Directors  (Sections  19-28) 21 

22.  General  Powers  of  Directors  (Sections  29-30)      ...  22 

23.  Regulations  as  to  Shares  and  Shareholders  (Sw.  31—32).  22 

24.  Increase  or  Decrease  of  CapHal  Stock  (Sections  33-35).  22 

25.  Shares  and  Calls   (Sections  36-42) 23 

26  Transfer  and  Transmission  of  Shares  (Sections  43-")3)  .  23 

27.  Annual  nnd  Special  Statements  (Sec.  54—33)  ....  24 

28.  Shareholders'  Audit  (Sec  56) 26 

29.  Special  Report  to  the  Minister  of  Finance 27 

30.  Dividends  (Sections  57- "9 > 27 

31.  Cash  Reserve  (Section  60) ...  28 

32.  General  Note  Issue  and  Circulation  of  Notes  (Section  6l)  28 
S3.  Additional  Issue  for  Moving  Crops  (Section  6l,  Sub-Sec. 

15-20) 28 

34.  Central  Gold  Reserve  Issr-    (Section  6l,  Sub-Sec.  3-13)  29 

35.  Note  Issue  in  British  Colonies  (Section  62)    ....  29 

36.  Pledge  of  Notes  Prohibited  (Section  63) 30 

37.  Bank  Circulation  Redemption  Fund  (Sections  64-69  •      •  30 

38.  Redemption  at  Par  (Secti   ns  70-71) 31 

39.  Payment  in  Dominion  Notes  (Section  72)    ....  31 

40.  Signing  of  Bills  (Sections  73-74) 32 

41.  Counterfeit  Notes   (Section  75) 32 


CHAPTER    IV 
THE    BANK    ACT   (Continued) 

42.  Business  and  Powers  of  a  Bank  (Sections  76-83)  ...  S3 

43.  Warehouse  Receipts  as  Collateral  Security  (Sections  84- 

90) 34 

44.  Rates  of  Interest  and  Exchange  (Sections  91-94)     .  37 

45.  Deposits  (Sections  95-98) 37 

46.  Purchase  of  Assets  of  a  Bank  (Sections  99-111)  ...  38 

47.  Returns  to  Government  (Sections  112-114)     ....  39 

48.  Payments  to  Minister  of  Finance  upon  Dissolution  of  3 

Bank 39 

49.  Canadian  Bankers'  Association  (Sections  117-124)   .      .  40 

50.  Insolvency  (Section   125) 41 


CONTENTS 


IX 


■BCnON  '*°'^ 

51.  Suspension   (Sections   126-,1S1) 42 

52.  Penalties  (Sections  131a-158) 43 

58.  Changes  in  the  Statements 44 

CHAPTER    V 
NOTE    ISSUES   AND    BRANCH    SYSTEM 

54.  Monetary   System 47 

55.  Dominion  Notes 49 

.    56.  Bank  Note  Issue 50 

57.  Security  to  Noteholder 51 

58.  Elasticity 52 

59.  Seasonal   Fluctuations 53 

60.  Annual  Changes 54 

61.  Monthly  Changes 57 

62.  Emergency  Currency 59 

63.  Central  Gold  Reserves 6l 

64.  Lost  and  Destroyed  Notes 63 

65.  Branch  System 6* 

66.  Branch  System  and  Circulation 66 

67.  Branch  System  and  the  Borrower 68 

68.  Establishing  a  Line  of  Credit 71 

69.  Branches  and   Panics 74 

70.  General  Review 76 


71. 
72. 
73. 
74. 
75. 
76. 
77. 
78. 
79. 
80. 
81. 


CHAPTER    VI 
ANALYSIS   OF  A  BANK  STATEMENT 

Bank  Statements 80 

Deposits  Payable  After  Notice 81 

Demand    Deposits 83 

Deposits  Elsewhere 85 

Due  Banks  in  Canada 85 

Due  to  Banks  in  Foreign  Countries 85 

Dominion  and  Provincial  Governments 86 

Circulation 87 

Capital  and  Reserve 87 

Specie  and  Dominion  Notes 88 

Notes  and  Checks  of  Other  Banks 89 


X  COXTFA'TS 

»i:rTiON  PaOI 

8i.'.  Deposits  with  Other  Banks 89 

8a.  Securities yo 

8k  Call  Loans  in  Canada 90 

85.  Call   Loans  Elsewhere 91 

86*.  Reserves 95 

87.  Current    Loans 93 

88.  Overdue   Debts 100 

89.  Real    Estate 101 

90.  Bank   Premises 102 

91.  Profit  and  Loss  Statement  of  a  Bank 103 

92.  Interest  on  Deposits IO6 

9S.  Profits  of  the  Percentage  Bank 108 

94.  Bank  Premises 108 

95.  Reserve  Fund 109 

96.  Gross  Profits 110 


PART  II:    BANKING  PRACTICE 

CHAPTER    I 

HEAD   OFFICE 

97.  Directors 113 

98.  General  Manager 115 

99.  Superintendent  of  Branches .      .118 

100.  Chief  Inspector 119 

101.  Secretary 120 

102.  Chief  Accountant 121 


CHAPTER    II 
HEAD   OFFICE    RECORDS 

103.  Head  Office  Bookkeeping 122 

104.  General  Ledger 122 

105.  Correspondents'    Ledgers 123 

106.  Statistical  Books 124 

107.  Branch  Clearings • 124 

108.  Stocks  Books,  etc 124 

109.  Circulation  Records 127 


fON'TENTS 


XI 


SECTION  »AOK 

110.  Returns  to  Head  Office 129 

111.  Branch  Clearings  Statement  (Daily) 129 

112.  Financial  Statement 130 

113.  Discount  Report 130 

114.  Cash  Item  Account 130 

115.  Balance  Sheet 130 

116.  Overdue  Bills 131 

117.  Monthly  Liability  Return 131 

118.  Sundry  Returns 131 

119.  Weekly    Report  on   Business 131 

120.  Records  of  Routine  Work 133 

CHAPTER    III 
THE    BRANCH    STAFF 

121.  Manager 135 

122.  Daily  Work 136 

123.  Accountant 138 

124.  Teller 140 

125.  Ledger-keeper 141 

126.  Collection  Clerk 142 

127.  Discount  Clerk 143 

128.  Junior 144 


CHAPTER    IV 
BANK    BOOKS    AND   RECORDS 

129.  Bank  Accounting 146 

130.  Books  of  a  Branch 147 

131.  Loose  Leaf  Accounting 150 

132.  Adding  Machines 151 

133.  Cash   Book 152 

134.  Writing  Up  Cash  Book 153 

135.  Sherbrooke  Cash  Book 155 

136.  Supplementary  Cash  Book 155 

137-     Discount  Register 157 

138.  Discount   Blotter 159 

139.  Discount  Diary 162 

140.  Trade  Bills  Remitted  Diary l62 


xu 


CONTENTS 


HKCTION 

141. 

142. 

143. 

144. 

145. 

146. 

147. 

148.* 

149. 

150. 

151. 

152. 

153. 

154. 

155. 

156. 

157. 

158. 

159. 

160. 

161. 

162. 

163. 

164. 

165. 

166. 


P*OE 

Drafts  Register 16* 

Check    Lists 166 

Cash   Items ^68 

Remittance  Book ^69 

Branch  Clearing  Statement 170 

At  Credit  Advices .    174 

Head  Office  Entries 176 

Business  with  Other  Banks 176 

Teller's  Records .      .    178 

General  Ledger 181 

Cash  Book  Ledger 183 

Current   Deposit    Ledger 189 

Savings  Bank  Ledger 191 

Liability  Ledger 192 

Collection    Register 195 

Collateral  Register 195 

Letters  Received  Register 197 

General  Statement  Books 197 

Past  Due  Bills  Register 198 

Produce  Book 198 

Balance  Book 198 

Overdraft  Register 198 

Discrepancies  Book 200 

Proforma  Stationery  Book 200 

Treasury  Cash 200 

Special  Registers 200 


167. 
168. 

169. 
170. 
171. 
172. 
173. 
174. 
175. 


CHAPTER    V 
DEPOSIT    BUSINESS 

New   Accounts 205 

Opening   Accounts 205 

Particulars  to  Be  Recorded  in  Ledger 207 

Partnership  Accounts 207 

Conversion  of  Partnership  Into  Joint  Stock  Company      .   208 

Joint  Accounts 208 

Accounts  with  Married  Women       . 208 

Waiver  and  Authority  to  Charge  Back 210 

Ledger 216 


CONTENTS 


•  t* 

xiu 


■BCTION 

176. 
177. 
178. 
179. 
180. 
181. 
182. 
183. 
184. 
185. 
186. 


rAOB 

Deposit  Slips 217 

Money  Received  After  Hours •      •      .217 

Customers'  Pass  Books 217 

Customers'  Certification  of  Accounts 219 

Guarding  Against   Fraud 222 

Certification  of  Checks 223 

Cashing  Checks 224 

Method  of  Filing  Checks  and  Deposit  Slips  .      .      .      .225 

Savings  Bank  Department 225 

Duplicate  Pass-books 226 

Interest  on  Savings  Bank  Accounts 227 


CHAPTER    VI 
LOANING    A    BANKS    MONEY 

187.  Experience  the  Only  Teacher 228 

188.  Causes  of  Failure  in  Business 230 

189.  Statement  of  Affairs 233 

190.  Science  of  Credit 237 

191.  Form  of  Statement 238 

192.  Cash         239 

193.  Merchandise 239 

194.  Bills  and  Accounts  Receivable 245 

195.  Machinery  and  Fixtures 246 

196.  Current  Liabilities 247 

197.  Mortgages  and  Other  Factors 247 

198.  Sundry  Information 248 

199.  Preparing  the  Application 250 

200.  The  Application 254 


201. 
202. 
203. 
204. 
205. 


CHAPTER    VII 

CLASSIFICATION    OF    LOANS 

Call   Loans 259 

Loans  to  Joint  Stock  Companies 261 

Loans   to   Municipalities 265 

Loans  to  Professional  Men 266 

Loans  to   Farmers 267 


XIV 


CONTENTS 


8ECTI0N  PAflC 

'206.     Loans  to  Retail  Mcrcliants '2(5!) 

'207.      Loans  to  Manufacturers  and  Merchants 270 

208.  Collateral  Notes 27:5 

209.  Accommodation   Paper 276 

210.  Overdrafts 278 

211.  Doubtful   Paper 280 

• 

CHAPTER    VIII 

ADVANCES   OX   WARKHOl'SK    RKCKIPTS    AXD    ASSIGXMF.XTS 

212.  Sections  86  and  88 283 

213.  Section  88 285 

214..     The  Promise 286 

215.  The  Assignment 287 

216.  The  Declaration 293 

217.  The  Note 296 

218.  Making  Advances 296 

219.  Warehouse  Receipts 302 

220.  Substitution 302 

221.  The  "Current  Season" 308 

222.  Default 309 

223.  General  Remarks 310 

22*.     Interpretation  of  Terms 311 


CHAPTER    IX 
BAXK   COST    ACCOrXTIVG 

225.  Need  of  Cost  System 31i 

226.  Principles  of  Cost  Accounting 316 

227.  Small  Checking  Accounts 318 

228.  Branch  Expenses 322 

229.  Inland  Exchange '.i'il 

230.  Cost  Data 329 

231.  An  Account  Analyzed 331 

232.  Method  of  Analysis 333 

233.  Exchange  Received  on  Items  Deposited  and  Collected      .  336 

234.  Checks  Paid  at  Par  at  Other  Branches 340 

235.  General  Remarks 343 


CONTENTS 


XV 


CHAPTER    X 

INTLRNAL   INSPECTION 

•acnoN  PAO» 

"■236.     Branch  Inspection 345 

237.  The  Audit 346 

238.  Cash  and  Securities 347 

239.  The   Ledgers,  etc 348 

240.  Sundries         349 

241.  Inspection  Liability  Return       . 351 

242.  Rules  and  Regulations 353 

243.  StafiF  Reports 854 


CHAPTER    XI 

LABOR-SAVING    METHODS 

244.  Efficiency  Methods 358 

245.  Departments  in  a  Bank 360 

246.  Batch  Method 363 

247.  Special  Deposit  Slips 366 

248.  Numerical  Transit  System 368 

249.  Transit  Numbers  in  Canada 372 

250.  Machine  Statements 375 


CHAPTER    XII 


MISCELLANEOUS 

251.  Collections 380 

252.  Reports  on  Customers 382 

253.  Expense  Account 383 

254.  Fire  Insurance 384 

255.  Telegrams,  etc 387 

256.  Clearing  Houses 388 

357.  Gnar.intees 389 

258.  Power  of  Attorney 391 

259.  Monev  Parcels 395 


XVI 


(ON'IKNTS 


BECTION 

'JfiO. 

iJti'2. 
'263. 
26t. 

y65. 

'266. 
267. 
268. 


Ipaoc 
\'aiilts  and  Sates 3f)(J 

Lost  C'lirrks  and  Drafts 398 

Custonirrs'    Wills 399 

Secrecy 400 

Education 401 

Canadian  Bankers'  Association 40 ^ 

Foreign  Branelies 40(J 

Correspondence .410 

Bills  of  Excliangc  Act 412 


PART  III:  FOREIGN    EXCHANGE 
CHAPTER    I 
.MF.CHAM.SM    OF    THK    KXCHAXGK    MARKET- 

269.  Inland  Exchange 41,-, 

270.  Inland  Exchange  in  United  States 41 7 

271.  New  York  Funds 418 

272.  Foreign  Exchange 421 

273.  The  Mint  Par 422 

274.  Gold  Points 426 

275.  How  Exchange  is  Quoted 428 

276.  Underlying  Principles 43O 

277.  Commercial  Long  Bills 433 

278.  Bills  of  Exchange  That  Involve  More  or  Less  Risk  .      .  436 
279-     Clean  (omrncrcial  Bills 437 

280.  Drafts  Drawn  Against  Securities 438 

281.  Bankers'  Long  Bills 438 

282.  Long  Bills  from  Loaning  Foreign  Money 439 

283.  Finance  Bills 442 

284.  Limitations  to  Finance  Paper  Issue 444 


CHAPTER    II 
HOW    MONEY    IS    MADE    IX    FOREIGN    EXCHANGE 

285.  The  Sale  of  Demand  Exchange 446 

286.  Merchant  Seller's   Credit 446 

287.  Banker's  London  Balance 448 


CONTENTS 


XVII 


•EmoN  rhom 

288.  Interest  on  Cable  Transfers 4*8 

289.  Against  Remittances  of  Sixty  and  Ninety  Day  Bills  .      .  449 

290.  A  Typical  Example 450 

291.  Opportunity  for  Profit 451 

292.  Loaning  Foreign  Money  on  Joint  Account 451 

293.  Nincty-dny  Bill  Operation 451 

294.  Loaning  on  Credit 452 

295.  Risk  of   Exchange 453 

296.  Commissions  on  Loans 454 

297.  Profits  Made  from  the  Purchase  of  Exchange  ....  454 

298.  Time  Money  Rates  on  Call  Money  Basis 455 

299.  Dealing  in  Futures 456 

300.  Arbitraging  in  Exchange 458 

SOI.     Arbitraging  Illustrated 458 

302.     Arbitraging  Operations 459 


CHAPTER    III 
FOREIGV    EXCHANGE   AND    IMPORTS 

303.  Commercial   Credits. — The   Financing   of    Experts   and 

Imports 46s 

304.  Commercial  Credit  Finance  Illustrated 467 

305.  Part  London  Plays 468 

306.  Value  of  Imp.icit  Trust 469 

307.  Banker's  Only  Security 470 

308.  Benefits  to  Importer 475 

309.  Benefits  to  Eyporter. 476 

310.  Banker's  Commission 477 

311.  An  Aid  to  Business 480 

312.  Growth  of  Commercial  Credit  and  Facilities  ....  480 


CHAPTER    IV 

FOREIGN  EXCHANGE  AND  THE  INTERNATIONAL  SECURITY 

MARKET 

313.  The  Three  Classes  of  International  Security  Dealings     .   482 

314.  Replacement  of  Maturing  Investments 483 

315.  International  Speculations 484 


•  •• 

XVlll 


CONTENTS 


HCCTinN  MOB 

:ll().     I  ntrrnntional  Arbitraging 486 

.'JIT.     Vnlur  of  Early  News 487 

818.     Arbitragr   Profits 488 

319-     Market  Influences 489 

320.     Strong  £ffect  on  Exchange  Rates 490 


CHAPTER    V 

THE    MOVEMENT   OF   GOLD 

S21.     Production  of  Gold 491 

322.     Distribution  of  Gold 492 

.S2.S.     Small  Merchandise  Exports 498 

an.     Low  Money  and  Remitting  of  Balances 494 

325.  High  Money  Rates 494 

326.  International  Trading  in  Securitiec 495 

327.  Methods  of  Moving  Gold 496 

328.  Indirect  Methods  of  Moving  Gold 497 

329-     Profits  on  Shipments 498 


CHAPTER    VI 


FOREIGN    EXCHANGE    OPER.VTIONS    IN    CONNECTION   WITH 

EXPORT   TRADE 

.'?.'?0.     Foreign  Exchange  and  Exports 300 

33\.  Financing  Exports  by  Means  of  Dollar  Credits  .            .  501 

332.  How  the  Exporter  Gets  His  Money 303 

333.  The  Question  of  Commission 304 

334.  Drafts  Direct  on  the  Importer 304 

335.  Improvement  in  Facilities 303 

336.  Export  Letters  of  Credit 306 

337.  How  the  Credit  Works 307 

338.  A   Concrete   Example 508 

339.  Why  the  Credit  is  Issued  on  London 309 

340.  The  Question  of  Interest 310 

341.  Where  the  Advance  is  Actually  Made 511 


CONTENTS 


xa 


CHAPTER    VII 

STERLING    EXCHANGE 

•tcnnH  ,^„ 

S42.     Great  Britain 312 

343.  Making  a  Rate 315 

344.  Interest 313 

345.  General  Notes  on  Sterling  Exehangc 318 

846.     Foreign  Exchange  Bookkeeping 321 

S47.     Drafts  Drawn 323 

848.     Bills  of  Exchange  Purchased 323 


CHAPTER    VIII 


349. 
350. 
351. 
352. 
353. 
354, 
355. 
356. 
857. 


CONTINKNTAL   EXCHANGE 

Latin  Union  Countries 527 

*''«ncc 528 

The  I'ranc  Quotation 329 

Time  Bills  33j 

Germany        .  ^.^c 

Holland    .      .  e^o 

Scandinavian  Liiion  and  Austria-Hungury     ....  534 

Asiatic  Exchange gjjj 

Sundry  Exchanges 337 


CHAPTER    IX 


FOREIGN    REMITTANCES 

358.  Non-Commercial    Exchange 53g 

359.  Principles  Underlying  the  Issuance  of  Drafts     .      .      .539 

.'^60.     Advices ^ , , 

541 

361.  Specimen   Forms  and  Signatures 343 

362.  Cost  of  Drafts  to  Purchasers !      !  54.8 

363.  Drafts  versus  Travelers'  Checks 544 

364.  Travelers'   Checks .      .      .  345 

365.  Payment    of    Checks 343 


xs 


CON'ILMS 


HcTinn  rAOE 

.'l()(i.      Pnynirnt  to  Hnldrrii StA 

:il)7.      Ilrdnnption  of  (  hrckti 5(7 

.'UiM.     Letter  of  Indirntion ,'»IN 

•Mj.      I.o<.t  Trnvelrru'   Chcek.i .5:.  I 

.'»T().      Letters  of  Credit .').Vi 

.'«7I.      I'liymrnl  to  the  Holder .I.". .' 

;«7'.'.     Cireiilnr   Notes T,".; 

7.'J.'}.     I'oreign   Money  Orders 5(il 

.174.     Pnyment  of  Orders 361 

S75.     Mail  Remittances 363 


»*«■ 
549 

3*7 

.I.Vi 

!i:,7 

AH  I 
56 1 
569 


FART  I:    BANKING  PRINCIPLES 

CHAPTER  I 

HISTORICAL   SKETCH 

1.  Introduction. ~li\  an  intelligent  study  of  the  Cana- 
dian hanking  system  particular  stress  should  he  laid  on 
the  fact  that  the  system  has  heen  evolved,  not  made;  that 
it  has  grown  up  with  the  country,  suffered  with  it,  pros- 
pered with  it  and,  since  the  Confederation,  been  the 
hackhone  of  commerce  and  agriculture.  The  careful 
decennial  revisions  of  the  hanking  laws  have  kept  the 
system  continually  in  touch  with  the  re(|uirements  of 
Canada's  constantly  altering  conditions.  In  fact,  in  nt 
other  country  does  the  history  of  hanking  support  st 
forcibly  the  contention  of  Horace  White  in  his  "Money 
and  Banking": 

The  principles  of  bunking  arc  the  outgrowth  of  experiment. 
They  must  bo  learned  from  the  history  of  banking  and  particu- 
larly from  the  laws  that  have  been  enacted  from  time  to  time. 
These  laws  arc  the  crystallization  of  ideas  dominant  at  given 
periods. 

The  history  of  banking  in  Canada  may  be  roughly  di- 
vided into  four  periods: 

1608-1763     New  France. 
1763-1817     British  Occupancy. 
1817-1867     Provincial  Banking. 
1867-1913     National  Banking  System. 
C— VIII— 1  1 


<?. 


BANKING    riUNdl'LKS 


2.  AVtf  France  (1008-170.^). — During  this  period 
Canadii  had  its  first,  and  it  is  to  be  \\o\nn\  its  last,  experi- 
ence in  "fiat"  money.  In  lieu  of  a  better  circulating 
medium,  beaver  and  other  furs,  Avheat  and  tobacco  were 
accepted  in  trade,  and  though  at  first  the  issue  of  gov- 
ernment obligations  in  the  shape  of  "ordonnances"  and 
card  money  were  a  welcome  relief,  the  scandalous  abuse 
of  this  privilege  quickly  brought  it  into  disrepute,  for 
no  matter  in  what  I'orm,  or  under  what  conditions  these 
obligations  wee  issued,  they  all  traveled  the  same  road 
to  ultimate  depreciation. 

The  country  found  itself  at  the  time  of  the  capitu- 
lation in  17(>0  loaded  with  a  tremendous  debt  of  over 
80,000,000  livres  outstanding,  of  which  some  34,000,000 
livres  were  in  ordonnances,  7,000,000  in  card  money  and 
treasury  bonds,  and  the  balance  in  other  forms  of  obli- 
gation. This  formed  one  of  the  most  difficult  problems 
that  confronted  the  British  goAcrnment,  and,  notwith- 
standing the  impoverished  condition  of  France,  they  in- 
sisted upon  a  definite  basis  of  settlement.  Accordingly, 
a  convention  was  signed  in  1706  under  which  bills  of 
exchange  and  kindred  obHgu*:ions  were  to  be  redeemed 
by  the  Freneli  government  at  50  per  cent  of  their  face 
value,  and  ordonnances  and  other  forms  of  debt  at  25 
per  cent.  Owing  to  circumstances  which  need  not  be 
entered  into  hece,  the  unfortunate  holders  eventually 
received  only  a  moiety  of  even  this  settlement. 

The  history  of  this  ])eriod  presents  an  instructive  les- 
son on  the  evils  of  money  issued  on  credit  only,  even 
though  the  creilit  is  that  of  a  government.  There  is 
no  doubt  that  yVlexander  Hamilton  had  the  sad  experi- 
ence of  New  France  before  him  when  he  made  his  severe 
stricture  on  government  issues  based  on  credit.  In  his 
report  on  banking  in  1700,  he  said: 


IIISTOUICAI.    SKETCH  3 

TliL'  iiuit tiller  of  paper  money  by  the  authority  of  the  gov- 
cnimcnt  is  wisely  prohibited  to  the  'tMlividual  states  by  the 
national  co.istitiitioM,  and  the  spirit  of  this  prohibition  ought 
not  to  be  disregarded  by  the  government  of  the  United  States. 
Though  paj)er  emissions  under  a  general  authority  might  have 
some  advantages  not  applicable  and  be  free  from  some  disad- 
vantages which  arc  applicable  to  the  like  emissions  by  the 
states  separately,  yet  they  are  of  a  nature  so  liable  to  abuse, 
an<l  it  may  even  be  affirmed  so  certain  of  being  abused,  that  the 
wisdom  of  the  government  will  !)e  shown  in  never  trusting  itself 
with  the  use  of  sn  seducing  and  dang-rous  an  expedient. 

3.  British  ot cupancy  fj 703-18 17). —The  British 
government  found  the  country  practically  without  any 
currency,  and  immediately  took  steps  to  place  the 
finances  of  the  colony  on  a  stable  foundation  by  estab- 
lishing an  equitable  and  permanent  standard  of  value 
for  the  various  coins  which  now  became  current  in  Can- 
ada. The  government  imported  and  paid  out  large 
(luantities  of  Spanish  milled  dollars  at  4s.  6d.  per  dollar 
or  $4>A4>i  per  pound  sterling,  the  old  par  of  exchange. 
These  were  used  for  the  payment  of  the  army  and  the 
l)urchase  of  public  supplies. 

In  1791  representative  government  Mas  established 
and  during  the  next  few  years  several  unsuccessful 
attempts  were  made  to  obtain  charters  for  banks  of 
issue. 

4.  Arm//  hills.— In  1812,  during  the  war  with  the 
T'nited  States,  the  government,  finding  itself  hampered 
by  a  sei-ious  lack  of  currency,  met  the  difficulty  by  the 
passage  of  the  Army  Bill  Act.  Under  this  act  the  Army 
Bill  office  was  established  and  empowered  to  issue  bills 
of  various  denominations.  These  bills  were  readily  ab- 
sorbed by  the  people,  who  were  quick  to  realize  the  ad- 
vantage of  a  system  of  financing  so  carefully  thought 


1 


HANKING    riUN(  IPLKS 


out  with  a  \  iew  to  prompt  and  satislactory  redemption, 
and  with  that  quality  of  ehisticity  which  later  hecame 
such  a  j)roniinent  feature  in  the  hank  note  circulation 
of  Canada. 

5.  Provincial  hauliu^  ( Isir-JStrrj.—The  contrac- 
tion of  the  Army  Bills  circulation  naturally  caused  great 
inconveniences  to  the  public;  the  principal  business  cen- 
ters, Montreal  and  Quebec,  being  the  greatest  sufferers. 
The  bills  filled  a  long-felt  want,  and  in  May,  1817,  to 
supply  their  place,  the  ^lontreal  Bank,  now  known  as 
the  Bank  of  Montreal,  was  founded,  followed  by  the  es- 
tablishment of  other  banks  under  charter  from  the  vari- 
ous i)rovinces.  Between  1817  and  182.'  two  banks  were 
established  in  Lower  Canada  ( Quebec  ^,  and  one  each 
in  Upper  Canada  ( Ontario) ,  New  Bru  >wick,  and  Nova 
Scotia.  There  was  no  attempt  at  uniformity  in  the  con- 
ditions of  the  various  charters,  but  little  attention  hav- 
ing been  paid  in  those  days  to  the  theory  of  banking. 
As  a  rule  the  charters  were  based  upon  the  articles  of 
agreement  as  dra*\n  up  by  the  incorporators,  and,  as 
might  be  expected  under  such  circumstances,  many  of 
the  clauses  were  dictated  by  selfishness  or  originated  in 
a  total  misconception  of  the  functions  of  a  bank. 

This  unsatisfactory  situation  was  further  complicated 
by  independent  ventures  into  the  field  of  banking  legis- 
lation by  the  Parliament  itself,  such  as  tl^  "Free  Bank- 
ing Act"  and  the  "Provincial  Note  Act."  Fortunately, 
the  British  government  was  fully  awake  to  the  dangers 
of  promiscu'jus  banking,  and  even  at  the  risk  of  having 
their  interference  in  these  matters  misconstrued,  per- 
sisted in  demanding  that  all  legislation  bearing  on  note 
issues,  banking,  and  the  like,  should  receive  the  royal 
assent  before  going  into  eftect.  The  young  colony  at 
first  resented  this  restriction,  but  sooq  learned  to  appre- 


mS'lOllK  AL    SKl/ITH 


5 


ciatc  the  jruidancv  of  riper  and  more  experienced  judg- 
ment, and  undoubtedly  this  wise  action  on  the  part  of 
the  Colonial  Office  saved  Canada  from  being  the  exploit- 
ing ground  of  many  unsound  and  dangerous  banking 
theories.  j\.s  it  was,  manj'  vicissitudes  were  experienced, 
and  in  1837,  during  the  rebellion,  a  temporary  suspen- 
sion of  specie  payments  occurred  under  permission  of 
an  order  in  counc.x.  The  necessity  for  this,  however, 
can  hardly  be  considered  a  reflection  on  the  banks,  as  it 
Mas  due  principallj'^  to  similar  though  more  serious  con- 
ditions which  obtained  at  that  time  in  the  United  States, 
Canada  then  as  now  being  intimately  concerned  in  the 
financial  welfare  of  its  neighbor  to  the  South. 

Considering  the  physical  and  other  disabilities  under 
which  these  early  banks  labored,  their  record  is  sur- 
prisingly creditable,  and  much  of  their  experience  and 
foresightedness  is  embodied  in  the  present  Bank  Act. 
In  fact,  from  1829  to  1866,  not  one  bank  failed.  True, 
trying  *imes  and  heavy  losses  were  met  time  and  again, 
but  with  the  exception  of  the  authorized  suspension  in 
1837,  which  was  very  reluctantly  taken  advantage  of,  the 
banks  not  only  remained  solvent,  but  maintained  the  re- 
demption of  their  obligations  in  specie.  Such  satisfac- 
tory results,  however,  cannot  be  ascribed  to  the  quality 
of  the  then  banking  laws,  so  much  as  to  the  common 
sense  and  judgment  of  the  Canadian  people  themselves. 
,  The  majority  of  the  banks  were  under  the  control,  if  not 
the  actual  manageznent,  of  Scotchmen,  who  had  a  keen 
appreciation  of  the  merits  of  the  banking  system  of  their 
native  land,  and  lost  no  opportunity  of  perpetuating 
and  extending  "for  the  farmer  and  merchant  the  lienefits 
and  stimulus  of  a  system  the  worth  of  which  Scotland's 
prosperity  could  abimdantly  prove."  These  men  with 
their  keen  and  analytical  minds  no  doubt  profited  by 


6 


nANKINc;    IMllM  IFLKS 


the  study  of  the  past  history  of  hanking  in  Canada,  and 
followed  closely  the  developments  of  hanking  in  Canada 
and  the  United  States.  To  such  men  the  sound  prin- 
ciples of  hanking  and  finance  advocated  by  Alexander 
Hamilton  nuist  have  ai)pealed  with  great  force,  though 
he  was  a  century  in  advance  of  his  times. 

6.  National  banking-  s/j.stem  (hsar-lOlS). — In  July 
18G7,  the  British  North  America  Act  was  passed  by  the 
Imperial  Parliament,  under  which  the  i)rovinccs  of  Can- 
ada were  confederated  into  the  Dominion  of  Canada. 
The  framers  of  the  act,  with  creditable  foresight,  realized 
that  the  banks,  like  the  railroads,  in  order  to  discharge 
most  effectively  their  natural  functions,  must  be  national 
in  character  rather  than  provincial,  and  to  this  end  vested 
in  the  parliament  of  the  new  Dominion  the  exclusive 
authority  to  legislate  on  n\\  matters  pertaining  to  banks 
and  banking,  currency  ?.(ul  coinage,  negotiable  instru- 
ments and  kindred  matters.  ^Vith  the  passing  of  the 
act  the  existing  banks  came  automatically  under  the 
new  jurisdiction.  Tentative  legislation  between  1867 
and  1870  extended  the  powers  of  the  banks  previously 
incorporated  by  the  provinces  to  the  whole  Dominion 
and  unified  the  laws  as  far  as  practicable. 

7.  First  hank  act  1871.— The  first  general  bank  act 
of  the  Dominion  was  passed  in  1871.  By  this  act  the 
duration  of  a  bank's  charter  was  practically  limited  to 
ten  years,  and  as  the  charters  of  the  banks  expired  they . 
were  renewed  until  the  following  revision  of  the  act.  The 
renewals  of  the  charters  were  thus  made  concurrent  with 
deceimial  revisions  of  the  act  in  1880,  1890,  1900,  and 
so  on.  Various  amendments  were  made  during  the  first 
few  years,  but  since  then,  except  at  tiie  regular  revisions, 
changes  have  been  infrequent,  and  have  l>een  made  only 
to  meet  some  contingency  due  to  the  rapid  expansion  of 


HISTORICAL    SKETCH 


Canada,  or  to  correct  some  omission  or  ambiguity  over- 
looked in  the  previous  revision. 

The  last  revision  should  have  been  made  in  1910,  but 
owing  to  causes  whitli  it  is  not  necessarj'  to  detail  here, 
the  charters  of  the  banks  were  extended  to  191.3.  The 
delay,  however,  was  accompanied  by  little  or  no  incon- 
venience to  those  concerned;  the  charters  of  the  various 
banks  were  extended  until  the  new  act  was  finally  passed. 
Changes  that  were  imminently  necessary  were  looked 
after  by  special  amendments  to  the  act  of  1900. 

In  many  ways  the  delay  was  not  without  its  advan- 
tages. The  tremendous  expansion  in  the  financial  and 
commercial  life  of  Canada  demanded  that  the  revision 
should  be  most  carefully  and  presciently  considered. 
During  1913  the  banking  system  of  Canada  was  freely 
discussed,  both  in  the  public  press  and  in  special  commit- 
tees appointed  for  the  purpose.  The  result  of  these  de- 
liberations will  be  dealt  with  in  a  chapter  on  the  Bank 
Act. 

It  is  notable  that  the  revisions  are  ne'"."ier  made  by 
theorists  nor  tainted  with  political  expediency.  The 
ablest  men  in  the  country,  regardless  of  their  politics,  are 
consulted  and  give  evidence  before  the  parliamentary 
committee.  Lawyers,  merchants,  farmers,  bankers  and 
others  equally  well  qualified  contribute  their  criticism 
and  advice  towards  the  advancement  of  the  best  inter- 
ests of  the  country.  The  measures  are  then  fully  debated 
and  when  finally  passed  are  acceptable  to  all  interested. 

This  brief  account  of  banking  in  Canada  is  given,  not 
as  a  history,  which  would  be  without  the  scojje  of  this 
volume,  but  in  order  to  assist  tlie  reader  in  realizing  that 
the  growth  of  the  banking  system  of  Canada  has  been 
one  of  evolution  rather  than  of  expediency  or  hasty  leg- 
islation, and  that  the  machinery  provided  for  the  sys- 


8 


BANKING    IMUNCIPLKS 


tciiiatic  and  regular  revision  of  the  Bank  Act  is  invalii- 
al)k'  ill  meeting  tlif  tivnjcii(l(Mi.sex|)ansi()ii  and  constantly 
changing  requirements  of  Canadian  commerce  and  ag- 
riculture. Tliis  chapter  road  in  conjunction  with  the 
chapter  on  the  Bank  Act,  and  the  explanation  of  the 
hranch  system  and  note  circulation,  should  demonstrate 
clearly  Iioav  far  the  functions  performed  hy  the  banks  in 
Canada  respond  to  the  requirements  of  a  new  country,  as 
defined  so  lucidly  by  Sir  Edmund  ^Valker: 

What  is  necessary  in  ii  banking  system  in  order  that  it  may 
answer  the  requirements  of  a  rapidly  growing  country  and  yet 
be  safe  and  profitable? 

1.  It  should  afford  the  greatest  possible  measure  of  safety 
to  the  depositor. 

2.  It  should  supply  the  legitimate  wants  of  the  borrower, 
not  merely  under  ordinary  circumstances,  but  in  times  of  finan- 
cial stress,  at  least  without  that  curtailment  which  leads  to 
abnormal  rates  of  interest  and  to  failures. 

3.  It  should  possess  the  machinery  necessary  to  distribute 
money  over  the  whole  area  of  the  country,  so  that  the  smallest 
possible  inequalities  in   the  rate  of  interest  will  result. 

4.  It  should  create  a  currency  free  from  doubt  as  to  value, 
readily  convertible  in  specie,  and  answering  in  volume  to  the 
requirements  of  trade. 

There  should  be  as  complete  a  relation  as  possible  between 
the  currency  requirements  of  trade  and  the  cause  which  issues 
paper  money,  and,  as  it  is  quite  as  necessary  that  no  over-issue 
should  be  possible,  as  that  the  supply  of  currency  should  be 
adequate,  there  should  be  a  similar  relation  between  the  require- 
ments of  trade  and  the  cause  which  forces  notes  back  for  re- 
demption. 


CHAPTER   II 


KIxNDS   OF    BANKS 

8.  Commercial  haiiks.—In  the  Bank  Act  of  Canada 
no  attempt  is  made  to  define  the  functions  of  a  bank  in 
general  terms;  the  act  merely  states  that  "a  bank  means 
any  bank  to  which  this  act  applies."  A  bank  in  Canada 
therefore  means  one  of  the  chartered  banks,  as  the  law 
prohibits  the  use  of  the  word  "bank"  by  any  other  insti- 
tution. 

The  State  of  Xew  York,  however,  is  more  venture- 
some in  this  direction  and  gives  the  following  excellent 
definition  of  a  bank  in  its  banking  statutes: 

The  term  bank  means  any  monied  corporation  authorized  by 
law  to  issue  bills,  notes  or  other  evidences  of  debt  for  circulation 
us  money,  or  to  receive  deposits  of  money  and  commercial  paper 
and  to  make  loans  thereon,  and  to  discount  bills,  notes  or  other 
commercial  paper,  and  to  buy  and  sell  gold  and  silver  bullion 
or  foreign  coins  or  bills  of  exchange. 

Economists  have  defined  the  functions  of  a  bank  in 
many  different  ways,  but  all  arrive  at  the  same  general 
conclusions.  Charles  F.  Dunbar,  in  his  "Theory  and 
History  of  Banking,"  gives  the  following  definition  of 
a  bank: 

A  bank  miy  be  described,  in  general  terms,  as  an  establish- 
ment which  makes  to  individuals  such  advances  of  money  or 
other  means  of  payment  as  may  be  required  ami  safely  made, 
and  CO  which  individuals  entrust  m  ney  or  the  means  of  pay- 


'A 


10 


BANKING    PUIVdPLKS 


nu'iit,  wlini  nt)t  riiinircil  liv  lliriii  for  iinc.  In  nlluT  wonis,  llie 
husiruvss  of  ;i  hank  is  said  to  Ik-  Io  liiiil  or  discount,  uiid  to  hold 
deposits.  Witli  tlieso  two  fiinctions  is  often  combined  n  third, 
tliiit  of  issuing  hunk  notes  or  the  Imnk's  ow/i  promises  to  piiy, 
for  use  in  general  circulation  as  a  sul)stituto  for  money. 

Horace  White,  in  his  "^loney  and  Banking,"  thus  tle- 
fincs  a  bank: 

An  institution  wliore  deposits  of  money  are  received  and  paid, 
where  credit  is  manufactured  and  extencJed  to  borrowers,  and 
where  the  excluin^e  of  property  is  facilitated.  Having  first 
acquired  the  confidence  of  the  community,  the  bank  extends  its 
credit  by  purchasin<5  interest-bearing  securities,  mainly  busi- 
ness men's  notes,  payable  at  a  fixed  time  and  giving  the  sellers 
the  right  to  draw  checks  upon  itself  payable  at  sight.  The 
amounts  thus  authorized  to  l)e  drawn  are  termed  deposits,  the 
bank  being  liable  for  them  in  the  same  way  as  for  actual  money 
deposited.  .  .  .  Bank  notes  are  the  bank's  promises  to  pay 
money  to  the  bearer  on  demand. 

Gilbart  says: 

A  banker  is  a  dealer  in  capital,  or,  more  properly,  a  dealer 
in  money.  He  is  an  intennediary  between  the  borrower  and 
the  lender.  By  this  means  he  draws  into  active  operations 
those  small  sums  of  money  which  were  previously  unproductive 
in  the  hands  of  private  individuals,  and  at  the  same  time  fur- 
nishes accommodation  to  those  who  have  need  of  additional 
capital  to  carry  on  their  business. 

E.  S.  Meade,  in  his  text  book  on  "Economics  of  Busi- 
ness," states  that: 

A  bank  is  an  institution  engaged  in  the  safekeeping  of  money 
and  other  valuables,  in  transmitting  funds  from  one  place  to 
anothci",  in  making  loans  and  in  buving  promises  to  pay  money 
in  exchange  cither  for  money  or  for  its  own  promise  to  pay 
money.  These  are  important  functions  of  a  bank,  although 
a  banker  performs  nu.ny  other  services  to  the  community. 


KINDS    or    HANKS 


11 


^\I1  thcso  fuiK'tioiis  arc  (liscliargo<l  by  the  Canadian 
imnks,  l»nt  tlK'ir  crontuiiio  valiii"  is  greatly  enlianeed  by 
the  system  of  branehes,  whieh  enables  the  banks  to  gather 
niul  (listribnte  money  over  the  whole  area  of  the  eonntry, 
thns  ntili/ing  as  far  as  possible  the  snpply  of  loanable 
eapital  to  meet  the  demand.  In  other  words,  throngh  the 
braneh  system  money  is  eonstantly  working  to  find  its 
own  level.  The  Canadian  banks  are,  therefore,  essen- 
tially of  a  national  rather  than  of  a  loeal  character. 

9.  Savifigs  hauh-H. — The  main  fnnction  of  a  savings 
bank  is  to  encourage  thrift  in  a  community  by  accepting 
for  dei>osit  money  in  small  amounts,  and  allowing  inter- 
est thereon.  Upon  deposits  of  this  class,  no  matter  how 
small  the  amount,  the  chartered  banks  of  Canada  pay 
interest  and  they  operate  as  part  of  each  branch  what 
is  called  a  Savings  Bank  Department.  Consequently 
the  need  of  special  institutions  for  this  purpose  has 
hardly  been  felt  in  Canada. 

Outside  the  government  savings  bank  there  are  prac- 
tically only  two  savings  banks  in  the  country,  namely: 
the  City  and  District  Savings  Bank,  INIontreal,  and  La 
Caisse  d'Economie,  Quebec.  These  are  well-known  in- 
stitutions and  are  highly  successful  in  encoiu'aging  thrift 
principally  among  the  Canadians  of  French  origin. 

The  Dominion  government  supports  two  savings 
banks,  one  the  Postal  Savings  Bank,  which  is  op- 
erated by  the  Post  Office  Department,  and  accepts  de- 
])osits  at  every  post  office,  and  the  other  called  The 
Government  Savings  Bank,  which  is  under  the  control 
ot  ihe  Finance  Department.  The  latter  receives  depos- 
its at  comparatively  few  points,  principally  in  the  larger 
towns  in  the  maritime  provinces,  and  its  business  is 
gradually  being  merged  with  that  of  the  Postal  Savings 
Bank.    The  money  received  from  these  savings  banks  is 


H 


nANKIN(;    PIUNCirLFS 


rcgunied  hy  the  govtiiinKiit  as  a  loan  wliicli  [narHcally 
leplucrs   inoii.y    that    coiihl    he    hoirowtd   at    a    louir 
cost  outside  of  Canada.     The  rate  of  interest  in  hotli 
hanks  is  3  per  cent.     Eaeh  entry  costs  ahout  12  cents 
or  A\'*  per  cent  of  the  avera«:e  deposit,  making  a  total  of 
3.G2  i)cr  cent.'     It  is  easily  seen  that  if  an  adecjnate  re- 
serve were  maintained  it  would  hring  the  cost  of  these 
deposits  to  over  i\  per  cent.    The  government,  however, 
avoids  the  ex|)ense  and  responsihility  of  maintaining  an 
adccpiate  reserve  hy  a  clause  in  the  IJank  Act  which 
makes  it  compulsory  foi  the  hanks  to  honor  government 
checks  without  charge  wherever  jH-esented,  and  all  with- 
drawals from  the  savings  hanks  are  in  this  form.    For- 
tunately, the  hurden  on  the  hanks  is  not  at  present  a 
serious  one  as  the  government  savings  hanks  control  only 
ahout  5  per  cent  of  the  total  dei)osits  of  the  country, 
the  chartered  hanks  holding  90  per  cent,  the  special  sav- 
ings hanks  3  per  cent,  and  the  trust  and  loan  companies 
the  balance,     ^^'ere  the  deposits  heavier  the  question 
would  be  a  serious  one,  not  only  for  the  banks  but  for 
the  country,  for  the  former,  on  account  of  the  burden 
of  maintaining  adequate  reserves  for  the  government, 
and  for  the  latter  on  account  of  the  increased  expense  of 
these  deposits  over  and  above  the  low  rate  of  interest  at 
which  the  government  can  borrow  in  Great  Britain. 

Theoretically  these  savings  banks  are  intended  for  the 
benefit  of  the  poorer  and  more  ignorant  classes  of  the 
community.  It  is  not  intended  that  the  well-to-do  should 
avail  themselves  of  the  privileges  they  offer,  and  to  this 
end  there  is  a  limit  i)lace(l  on  the  amount  which  nuiy  be 
deposited. 

10.  Trust  and  loan  com  panics. — Of  late  years  a  con- 
siderable number  of  these  companies  have  been  organized 

*  Hearing  before  House  rommittce  on  Post  Office  Savings  Bank  IflOfl.  pape  70. 


KINDS    or    HANKS 


IS 


ill  Caiiiulu  nmlcr  provincial  or  Dominion  diarters,  and 
as  it  is  an  o|)tii  «|iitstion  wlictlicr  llicir  control  is  vested 
ill  tlic  federal  «»r  in  tlie  provincial  authorities,  some  com- 
panies, to  make  sure  of  their  position,  have  ohtained 
charters  from  both  sources. 

Trust  and  loan  companies  are  supposed  to  enter  into 
the  field  of  banking  only  in  so  far  as  it  is  necessary  to 
transact  their  especial  business.  There  is  a  tendency, 
however,  recently  develoi)ed.  to  enter  into  competition 
with  the  banks  in  various  ways,  especially  in  canvassing 
for  demand  <leposits.  This  is  a  dangerous  practice  for 
trust  companies  to  indulge  in,  as  has  already  been  dem- 
onstrated in  the  United  States.  Demand  deposits  re- 
quire special  provision  in  the  shape  of  cash  reserve,  and 
a  study  of  the  annual  statement  of  the  average  trust  or 
loan  company  will  show  how  little  this  responsibility  is 
realized  or  i)rovided  for.  lAke  the  government,  each 
company  evidently  thinks  it  can  rely  on  the  banks  in  case 
of  trouble,  overlooking  entirely  the  fact  that  at  such 
times  the  banks  themselves  are  making  every  effort  to 
protect  their  own  reserves,  and  would  hardly  be  willing 
to  advance  money  to  a  corporation  which  has  all  its  assets 
locked  up  in  real  estate  and  other  fixed  securities. 

One  of  the  basic  principles  of  credit  is  that  the  cur- 
rency of  the  assets  should  not  exceed  the  currency  of  the 
liabilities,  and  any  departure  from  this  principle  is  bound 
to  prove  eventually  disastrous.  The  assets  of  trust  and 
loan  companies  in  Canada  are  invariably  based  entirely 
on  real  estate  and  other  non-licjuid  securities,  and  their 
deposits,  if  any,  should  be  composed  of  the  long  time 
funds  of  the  community — those  which  are  not  regularly 
emj)loyed  in  the  quick  turnover  of  commercial  life.  To 
accept  demand  de^^osits  and  then  loan  on  real  estate  the 
funds  thus  obtained  is  to  invite  disaster.     The  question 


f 


1»  HANKINC;    IMIINC  IPM'.S 

is  u  serious  one  for  the  eoiintry,  mihI  likely  to  prove  more 
serious  later  on,  unless  steps  are  taken  to  bring  all  tliese 
eonipanies  under  government  eontn»I  with  unit'orni  char- 
ters. To  he  e«)nsistent.  the  same  sound  considerations 
which  led  the  framers  of  the  Hank  Act  io  prohibit  banks 
from  loaning  on  real  estate  should  work  inversely,  and 
shouhl  withhold  from  companies  loaning  on  real  estate 
the  right  to  receive  demand  deposits.  As  ample  funds 
are  obtainable  both  in  Canada  and  Kurope  from  the  sale 
of  dek'ntures  and  bonds  secured  by  real  estate,  a  com- 
pany well  managed  and  reputable  has  no  need  to  plunge 
into  the  dangerous  ebb  and  flow  of  transient  money. 

Owing  to  the  diti'usion  of  control  no  complete  record 
of  the  business  of  trust  and  loan  companies  is  available. 
Both  the  Dominion  ai\(l  Ontario  Acts  call  for  annual 
statements  from  companies  within  their  jurisdiction,  but 
the  information  afforded  is  far  from  satisfactory  or  com- 
plete, and  naturally  does  not  cover  the  whole  of  Canada. 
In  the  rejwrt  of  the  Ontario  registrar  of  loan  and  trust 
companies  for  the  year  ended  December  .'H,  1912,  de- 
posits are  given  as  $21,r).30,(>nO,  debentures  payable  in 
Canada  r.l.H:iO,GJ.;},  and  debentures  payable  elsewhere 
as  .$67,708,2.59,  an  increase  in  the  latter  of  over 
$10,000,000  for  the  year.  From  these  figures  it  will  be 
seen  that  the  greater  part  of  liabilities  to  the  public  con- 
sists of  debentures  issued  to  foreign  purchasers,  and  that 
these  corporations  perform  an  invaluable  service  to  t!ie 
country  in  obtaining  foreign  capital.  The  principal  as- 
sets of  these  companies  consist  of: 

Mortgages $157,979,495 

Municipal  debentures,  etc 5,687,823 

Stocks  and  bonds 27,292,174 


^K 


CHAPTER   HI 


THE    BANK    ACT 

11.  The  Bauk  Act  of  /,'>/.;.-  Tiie  present  Bank  Act,* 
wliich  came  into  force  on  July  1.  19i;j.  consists  of  one 
hundred  and  sixty  sections  or  clauses.  Its  leading  fea- 
tures may  he  hriefly  summarized  as  follows: 

1.   Intorpretation  and  application Sections       1-7 

?.'.   Incorporation  of  new  banks «  8_|.y 

!}.   rurcliasc  of  the  assets  of  a  bank "  99-111 

\.   Insolvency  and  windinpr  up,  eti "        113-131 

5.  Offences  and  penalties «      131a-160 

6.  Ii.tcrnal  regulations  as  regards  directors, 

shares,  annual  statements,  audits,  etc.  "  18-60 

7.  Returns  to  government '«  112-lH 

S.   Note  issues <*  fil— 7*5 

'.)    Business  and  powers  of  a  bank "  76-98 

It  will  be  noted  that  the  first  five  divisions  deal  with 
special  conditions,  such  as  the  establishment  of  new  banks, 
amalgamations,  etc.,  and  are  of  only  occasional  applica- 
tion. The  last  fom-,  however,  deal  with  matters  of  cvery- 
(hiy  banking  and  call  for  careful  study.  The  last  divi- 
sion, "Business  and  powers  of  a  bank,"  wherein  arc  de- 
fined the  business  relations  of  banks  with  the  public,  is 
therefore,  of  particular  interest  to  branch  officers.    The 

'Copies  of  the  Bank  Act  or  Bills  of  ExchariRe  Act  may  be  obtained  by  remit- 
I  ing  twenty  cents  for  each  c>  .^   to  the  King's  Printer,  Ottawa. 

15 


,6  IIANKINO    IM11NCH'1.1'.S 

o,l,c,-  tince  headings  deal  -"unatters  more  or^e^s  per- 
tainiiiK  to  oi-  .aider  the  .liiect  control  ol  Head  Oftice. 
i-    C7,„,«r»  in  the  Bank  .Jc(.-T«o  very  important 

Jwions  ,vae  n.ade  in  the  l---',-'> --']•,  '^ 
tions  providing  for  a  shareholders  »";)'«_;  »f'^,^^^„\ 
tion  o(  central  gold  reserves  hi  connection  with  the  issue 
,  extra circnlafion  «he„  re.,uired.   Authority  was  g.v» 
t„  loan  money  to  farmers  on  the  security  of  thres  u 
,   a^,  and  a  number  of  minor  changes  were  made  mo  Hy 
^  a  routhie  or  explanatory  .haraeter,  such  as  the  op^,. 
i,  g  up  of  registry  offices  in  the  different  provinces,  the 
riiZg  of  lection  1«  on  stock  books  and  documents, 
ind  the'likc.  and  the  establisbmcnt  of  -eral  new  h  f  - 
iiiffs  in  the  monthlv  and  annua!  statements.    The  central 
gold "Lves  will-be  dealt  with  in  the  chapter  on  note 

"T  Sl,arcM,lcn-  andit.-A  provision  for  the  external 
sunervision  of  banks  is  an  entirely  new  feature  of  the 
Bank  Act.    Xo  objection  was  advanced  by  anyone  as 
fotetesirability  'or  usefubiess  of  *-  external  audit 
itself,  but  the  problem  was  how  to  effect  an  audit  with- 
out evoking  the  aid  of  too  cumbersome  or  too  burden- 
some machinery,  and  how  to  avoid  placmg  too  great  a 
burden  of  responsibility  on  those  assuming  the  work, 
without  first  ascertaining  how  far  the  physical  limita- 
tions of  any  such  examination,  due  to  the  branch  system 
would  affect  the  value  of  its  conclusions.    Three  forms 
of    external    supervision    were    given    consideration, 
namely:  examination  by  the  Dominion  government.^  by 
the  Canadian  Bankers'  Association,  and  by  competent 

accountants.  ,  .  ,        ., 

The  idea  of  government  supervision  was  advocated 
bv  those  who  were  admlicrs  of  the  system  of  nationa 
hank  e         nations  obtaining  in  the  United  States.    It 


THE    BANK    ACT  17 

is  obvious,  liowever,  that  even  if  these  exammations 
were  effective  in  the  United  States  (which  is  very  mucli 
open  to  question),  tlie  plan  itself  would  not  be  feasible 
in  Canada  on  account  of  the  branch  system.  Further- 
more, there  is  no  doubt  that  the  government  inspection 
of  a  bank  is  taken  by  the  public  in  a  way  as  a  guarantee 
of  solvency.  In  the  United  States  such  a  belief  is  of 
only  local  effect  whereas  in  Canada  it  would  be  national 
in  Its  influence,  would  practically  put  all  banks  on  the 
same  footing  in  the  public  eye,  and  would  work  a  pal- 
pable injustice  to  those  banks  Mhich  have,  by  years  of 
sound  banking,  established  themselves  firmly  in  the  con- 
fidence of  the  public. 

With  such  supervision,  therefore,  would  go  a  great 
deal  of  responsibility  for  a  bank  failure,  and  this  re- 
sponsibility the  government  was  naturally  reluctant  to 
assume.    Another  objection  to  government  supervision 
would  be  the  fact  that  the  appointments  of  examiners 
would  run  the  risk  of  being  occasionally  based  on  politi- 
cal expediency,  rather  than  on  expert  knowledge  and 
fitness  for  the  positions.    The  information  so  far  made 
pubhc  as  to  the  failure  of  the  First-Second  National 
iiank  of  Pittsburg  is  a  serious  and  almost  unanswerable 
reflection  on  the  present  system  of  examination,  and 
must  undermine  the  public  confidence  in  the  efficacy  of 
government  supervision  in  the  United   States      The 
Canadian  government  was  well  advised  in  not  allowing 
itsdf  to  be  burdened  with  a  new  and  unknown  responsi- 

The  Canadian  Bankers'  Association  was  also  averse  to 
assuming  the  responsibility  of  inspection,  as  such  action 
would  be  considered  tantamount  to  a  guarantee  by  the 
cssomted  banks  of  the  solvency  of  the  individual  banks. 
Furthermore,  no  matter  how  impartially  such  a  super- 


18  nANKIN(;    rUlXCIPLES 

vision  was  exercised  by  the  Association,  it  would  always 
l)e  oi)en  to  misconstruction,  and  any  hank,  whose  affairs 
called  for  criticism,  would  not  he  likely  to  neglect  an 
oijportumty  of  appealing  to  the  public  sympathy  with  a 
cry  ot  j.'cisecution. 

The  system  finally  ad()]>tcd  i)romiscs  to  overcome  the 
above  objections  and  to  be  a  satisfactory  sohition  of 
the  (luestion.  The  act  provides  for  the  appointment  of 
auditors  by  the  shareholders  of  each  bank  from  a  panel 
of  forty  or  more,  selected  by  the  general  managers  of  all 
the  banks,  and  aj)]  roved  by  the  Minister  of  Finance. 
These  auditors  check  the  cash  and  verify  the  securities 
of  the  head  office  and  such  branches  as  they  may  deem 
necessary  to  visit,  and  report  to  the  shareholders  annu- 
ally upon  the  affairs  of  the  bank. 

14.  Abstract  of  the  Hank  Act.— A  knowledge  of  the 
Bank  ^Vct  is  most  necessary  in  the  study  of  both  the 
theory  and  the  practice  of  Canadian  banking,  and  in  a 
volume  of  this  nature  a  brief  synopsis  of  the  act  will 
be  found  useful.  The  full  text  of  the  act  should  of 
course  be  consulted  when  the  exact  wording  is  desired. 

1.5.  Title  and  interpretations    (SectivOjis  1-2). The 

act  may  be  cited  as  the  ijax k  act.  The  intention  of  the 
act  in  Its  use  of  certain  words  and  expressions  is  clearly 
defined. 

10.  Application  of  the  Bank  Act  (Sections  3-7).— 
The  provisions  of  the  act  apply  to  the  following  banks: 

V  r  ij      ;  I '/lief  Office 

Ihe  Bank  of  Nova  Scotia Halifax 

The  Bank  of  Toronto Toronto 

The  ^folsons  Bank    ..;.;:  Montreal 

l>a  Banque  Natinn;t!<>      Quehec- 

The  Merdianfs  Bjink  of  ("nii.i.lM  Ar„„4-_i 


llli:    JJAMv    ACT  19 

Lii  Baiiquo  I'rovincijilc  da  Canada ■Vronlreal 

,'!!|»^  I'liioti  Bank  of  Canada Winnipeg 

1  lie  I  anadian  JJank  of  ConiiiKTco Toronto 

Tlio  Royal  Bank  ol"  Canada Montreal 

The  Dominion  ]{ank Toronto 

Tlie  Bank  of  Hamilton .,,,.•;  Hamilton 

I  he  Standard  Bank  of  Canada Toronto 

ha  Biuujne  d  Jlochelaga Montreal 

he  Bank  of  Ottawa. Ottawa 

Ihe  ImiKTial  Bank  of  Canada Toronto 

The  Sovereif,'!!  Bank Toronto 

The  Metropolitan  Bank Toronto 

'riie  Home  Bank  of  Canada.  • Toronto 

The  Northern  Crown  Bank Winnipeg 

The  Sterling  Bank  of  Canada '  Toronto 

The  Bank  of  Vaneouxer Vaneouver 

1  tie  Ueylnirn  Seenrity  ]Jank Weyburn 

Bank  of  British  North  America London,  Eng. 

The  act  extends  these  charters  from  July  1,  1913,  to 
July  1,  1923,  and  makes  special  provision  for  the  Bank 
of  British  North  America,  which  still  operates  under  its 
original  roval  charter. 

17.  Iiicorpordiion  of  b  ks  (Sections  8-12). —The 
conditions  under  which  a  new  hank  may  be  organized 
and  the  procedure  necessary  are  clearly  set  forth.  The 
first  step  is  to  obtain  an  Ac*  )f  Incorporation  by  means 
of  an  application  signed  by  at  least  five  responsible  men 
known  as  pro\isionaI  directors,  who  are  able  to  satisfy 
the  Parliamentary  Conmiittee  on  Banking  and  Com*- 
tnerce  that  their  i)roject  is  a  genuine  one,  that  they  are 
fully  aware  of  the  responsibility  of  their  undertaking, 
and  that  they  have  the  ability  and  backing  necessary 
to  carry  out  the  organization  of  a  bank  successfully.  If 
the  committee  rei)orts  favoi-aI)ly,  letters  of  incoi^ora- 
tion  are  granted,  and,  after  ten  days'  public  notice,  the 
provisional  directors  may  advertise  for  public  subscrip- 
tions, and  cause  stock  books  to  be  opened.  Xo  bank, 
however,  can  be  incorporated  with  a  capital  less  than 
•'t<500,000,  divided  into  shares  of  .$100  each. 


20 


HANKIN(i    rUIN(  II'I.F-S 


18.  Organhaliun  of  hanks  (Sections  13-17). — If 
within  a  year  the  sum  of  not  less  than  $500,000  of  the 
capital  stock  of  the  bank  has  beer  bona  fide  subscribed, 
and  not  less  t1i;in  $250,000  paid  in  and  deposited  with 
the  jMinister  Finance,  the  provisional  directors  may, 
by  public  notice  published  for  at  least  four  weeks,  call 
a  meeting  of  the  subscribers  for  the  purpose  of  organiz- 
ing the  bank.  At  this  meeting  the  subscril)ers  shall 
elect  five  or  more  (qualified  directors  to  replace  the  pro- 
visional directors,  determine  the  date  of  the  annual 
meeting,  etc.  ^V  certificate  of  the  Treasury  Board  ^  per- 
mitting the  bank  to  commence  business  may  now  be 
applied  for,  but,  before  issuing  such  a  certificate,  the 
Treasury  Board  must  be  satisfied: 

1.  That  the  payments  and  subscriptions  are  all  gen- 
uine and  in  form. 

2.  That  the  deposit  of  $250,000  with  the  :Minister  of 
Finance  has  been  made,  and  is  still  in  his  hands: 

3.  That  the  directors  are  qualified  and  have  been  reg- 
ularly elected. 

4.  That  the  expenses  of  incoriioration  and  organiza- 
tion are  reasonable. 

5.  That  all  other  requirements  have  been  complied 
with. 

If  everything  is  found  satisfactory  a  certificate  will 
then  be  granted  and  the  deposit  of  $250,000  returned, 
less  a  deduction  of  $5,000  as  the  initial  payment  on  ac- 
count of  the  Bank  Circulation  Redemption  Fund  (see 
Section  04f) .    Then,  and  not  until  then,  is  the  new  bank 

'  The  Trrasur>'  BiKird  pxcrrises  important  functions  un<ler  the  art,  and  i.s 
frequently  reforn'd  to.  The  Minister  of  Finance  and  Reccivcr-deneral  is  the  chair- 
man of  the  board,  which  consists  of  four  other  miiiisters  belonging  to  the  King's 
Privy  Council  for  Canada,  nominated  from  time  to  time  by  the  Govemor-in- 
Council.  The  Treasury  Board  acts  as  a  committee  of  the  PriN-y  Council  on  all 
malltTs  n-fcrriti};  to  fitiurn-c  :ind  pub'ie  atx-uunts  an  1  bus  power  to  call  for  any 
information  it  ni;iy  require  from  coiporutions  and  jM-rsons,  etc.,  bound  by  lixw  to 
furiiisli  the  ^ilnlr  to  liic  ifovcnimenl. 


\ 


THE    BANK    ACT 


21 


ul)le  to  issue  notes,  open  branelies  and  comnienee  the  gen- 
eral business  of  banking. 

19.  Refusal  of  certificate.— If,  however,  the  certifi- 
cate of  the  Treasury  Board  is  not  obtained  within  one 
year  from  tlie  date  of  the  passing  of  the  ^Vct  of  Incor- 
poration, all  the  rights  and  privileges  granted  there- 
under cease,  and  provision  is  made  for  the  equitable 
liquidation  of  any  bank  so  unsuccessful.  The  severe 
penalties  attached  to  any  infraction  of  the  regulations 
covering  the  incorporation  and  organization  of  banks 
are  set  out  in  Sections  131  and  132. 

20.  Bj/-Iaws  (Section  18).— The  shareholders  may 
pass  by-laws  regarding  the  following  matters:  the  date 
of  the  annual  general  meeting  at  which  shareholders 
elect  directors;  regulations  (subject  to  limitations  men- 
tioned in  act)  as  to  proxies;  the  number,  quorum,  quali- 
fications, remuneration,  etc.,  of  directors;  limits  of  loans 
or  discounts  to  directors  or  to  any  one  person,  firm,  or 
corporation;  authority  to  contribute  to  guarantee  and 
I)ension  funds,  etc.  A  copy  of  all  the  by-laws  of  a  bank 
m  force  on  July  1,  1913,  must  be  sent  to  each  share- 
holder before  December  31,  1913,  and  within  six  months 
after  the  end  of  each  fifth  year  thereafter,  a  copy  of  the 
then  current  by-laws  must  similarly  be  sent. 

21.  Board  of  directors  (Sections'l9-28).— The  stock, 
property,  affairs,  and  concerns  of  the  bank  are  managed 
by  a  board  of  directors  who  are  to  be  elected  annually 
and  shall  be  eligible  for  re-election,  subject,  however, 
to  the  following  provisions: 

Each  director  shall  hold  stock  of  the  bank  as  absohite  and 
sole  owner  in  his  individual  right,  on  which  not  less  than  from 
$3,000  to  $5,000  has  been  paid  up,  the  amount  varying  accord- 
■ng  to  the  paid-up  capital  of  the  bank.  This  amount,  however, 
may  be  increased  bv  bv-law. 


c'>C> 


HANKIN(i    1MUN(  IPLKS 


The  majority  of  the  directors  must  be  liritish  sub- 
jects living  in  Canada. 

The  method  by  which  directors  shall  be  elected  is  pro- 
vided for,  also  the  manner  in  which  directors  shall  elect 
the  president,  vice-president,  and  fill  vacancies  on  the 
board. 

22.  General  poxcers  of  directors  (Sections  20-30). — 
The  directors  may  make  by-laws  for  the  regulation  of 
all  matters  in  connection  with  the  business  of  the  bank, 
the  duties  and  conduct  of  the  employees,  and  the  estab- 
lishment of  guarantee  and  pension  funds  for  the  staff. 

The  directors  are  required  to  obtain  satisfactory  se- 
curity from  all  officers  and  clerks  for  the  faithful  per- 
formance of  their  duties. 

23.  Regulations  as  to  shares  and  shareholders  (Sec- 
tions 31-32). — A  special  general  meeting  may  be  called 
at  any  time  for  any  purpose  by  four  or  more  of  the 
directors,  or  by  at  least  twenty-five  of  the  shareholders 
who  own  not  less  than  one-tenth  of  the  paid-up  capital 
stock  of  the  bank. 

Votes  of  the  shareholders  at  any  meeting  must  be 
by  ballot,  and  each  shareholder  has  one  vote  for  each 
share  owned.  Shareholders  may  vote  by  proxy,  but 
no  shareholder  who  is  also  an  employee  of  the  bank  is 
allowed  to  vote. 

24.  Increase  or  decrease  of  capital  stock  (Sections 
33-35)  .—The  capital  stock  of  the  bank  may  be  increased 
at  any  time  by  a  by-law  passed  at  a  general  meeting  of 
the  shareholders,  subject,  however,  to  the  approval  of  the 

Treasury  Board. 

New  shares  issued  must  be  allotted  to  the  sharehold- 
ers pro  rata  on  such  terms  as  are  fixed  by  the  directors, 
with  certain  limitations  as  to  price  and  the  amount 
and  frequency  of  the  culls  for  payment  thereof. 


THE    BAXK    ACT 


2.'J 


Provision  is  made  for  the  reduction  of  the  capital 
stock  of  the  bank  if  sucli  action  should  become  neces- 
sary. 

25.  Shares  and  calls  (Sections  36-42). — Shares  of 
the  capital  stock  of  a  bank  shall  be  personal  property. 
The  manner  of  subscribing  for  sliares  and  making 
calls  thereon  is  provided  for.  Calls  shall  be  made  at 
the  option  of  the  directors,  but  such  calls  shall  be 
payable  at  intervals  of  not  less  than  thirty  days,  and 
in  amounts  not  exceeding  10  i)er  cent  of  each  share 
subscribed. 

There  must  be  printed  on  each  page  of  the  stock  book 
upon  which  subscriptions  for  new  stock  are  recorded, 
and  "on  every  document  constituting  or  authorizing  such 
subscriptions,  on  a  part  of  the  page  and  document,  re- 
spectively, which  may  be  readily  seen  ])y  the  person 
recording  the  subscription,  or  by  the  person  signing  the 
document,  a  copy  of  Section  125,"  which  provides  fcr 
the  double  liability  of  the  shareholders. 

26.  Transfer  and  transmission  of  shares  (Sections 
43-53). — No  transfer  is  valid  unless  the  stock  has  been 
accepted  in  writing  by  the  person  to  whom  the  transfer 
is  made,  and  the  person  transferring  the  stock  has  satis- 
fied the  bank  as  to  any  liability  that  may  be  due  it. 

The  bank  may  oj)en  and  maintain  in  any  province  in 
t'  mada  in  which  it  has  one  or  more  branches  a  share 
registry  office,  at  which  the  shares  of  the  shareholders 
resident  in  that  province  shall  be  registered.  A  list  of 
all  transfers  of  shares  registered  each  day  at  the  respec- 
tive places  where  transfers  are  authorized  shall  be  made 
up  each  day  and  kept  for  the  inspection  of  the  share- 
holders. 

The  procedure  in  connection  with  the  sale  and  trans- 
mission of  shares  under  special  conditions,  such  as  writ 


24 


HANKING    rUINCIPLKS 


of  exe(  .itioii,  marriage  of  female  shareholders,  lunacy, 
bankruptcy,  death,  and  the  like,  is  set  forth. 

A  bank  is  not  bound  to  see  to  the  execution  of  any 
trust,  whether  expressed,  implied  or  constructive,  to 
which  any  share  of  its  stock  is  subject.  A  person  hold- 
ing stock  as  executor,  trustee,  guardian,  etc.,  is  not  per- 
sonally liable  uidess  the  tr  ist  is  not  disclosed. 

27.  Annual  and  special  statements  (Sections  54-55).* 
— At  every  ainmal  general  meeting  the  outgoing  direc- 
tors must  submit  a  full  statement  of  the  affairs  of  the 
bank.  The  statement  must  include  and  show  the  fol- 
lowing particulars: 


ASSETS 


(a)  Current  coin  licld  l)y  the 
bank. 

(b)  Dominion   notes   held. 

(c)  Notes  of  other  banks. 
((I)   Checks  on  other  banks, 
(r)    Bahinces    duo     by    other 

banks  in  Canada. 

(f)  Balances  due  by  banks 
and  banking  correspond- 
ents elsewhere  than  in 
Canada. 

(^)  DoininJon  and  provincial 
pfovernnient  securities, 
not  exceeding  market 
value. 

(h)  Canadian  municipal  se- 
curities, and  British,  for- 
eign and  colonial  public 
securities  other  than  Can- 
adian. 


(i)  Railway  and  other  bonds, 
debentures  and  stocks, 
not  exceeding  market 
value. 

(j)  Call  and  short  (not  ex- 
ceeding thirty  days) 
loans  in  Canada  on  bonds, 
debentures  and  stocks. 

(k)  Call  and  short  (not  ex- 
ceeding thirty  days) 
loans  elsewhere  tlmn  in 
Canada. 

(1)  Other  current  loans  and 
discounts  in  Canada  (less 
rebate  of  interest). 

(m)  Other  current  loans  and 
discounts  elsewhere  than 
in  Canada  (less  rebate  of 
interest). 


'See  figure  2  for  presfribpcl  form  for  monthly  statements. 


THE    BANK    ACT 


2A 


(ii)   Liabilities    of    customers 

under     letters     of    credit 

as  per  contra, 
(o)   Real    estate    other    than 

bank  premises, 
(p)   Overdue  debts,   estimated 

loss  provided  for. 
(q)    Bank    premises,    at     not 

more      than     cost,     less 


amounts  (if  any)  written 

off. 
(r)   Deposit  with  the  Minister 

for   the  purposes   of  the 

Circulation  Fund, 
(s)   Deposit    in    the    central 

gold  reserves, 
(t)  Other  assets  not  included 

in  the  foregoing. 


LIABILITIES 


(a)  Capital  stock  paid  in. 

(b)  Rest  or  reserve  fund. 

(c)  Dividends  declared  and 
unpaid. 

(d)  Balance  of  profits. 

(o)  Notes  of  the  bank  in  cir- 
culation. 

(f)  Deposits  not  bearing  in- 
terest. 

(g)  Deposits  bearing  inter- 
est, including  interest  ac- 
crued to  date  of  state- 
ment. 


(h)  Balances  due  to  other 
banks  in  Canada. 

(i)  Balances  due  to  banks 
and  banking  correspond- 
ents in  the  United  King- 
dom and  foreign  coun- 
tries. 

(j)   Bills  payable. 

(k)  Acceptances  under  let- 
ters of  credit. 

(1)  Liabilities  not  included  in 
the  foregoing. 


Any  other  particulars  which,  in  the  opinion  of  the 
directors,  are  necessary  to  a  full  and  clear  statement  of 
the  affairs  of  the  bank,  should  also  be  given. 

A  statement  of  the  profit  and  loss  account  for  the 
financial  year  next  preceding  the  date  of  the  annual 
general  meeting  must  accompany  the  statement.  These 
statements  must  be  signed  by  the  general  manager  or 
other  officer  of  the  bank  next  ii.  authority,  and  on  be- 
half of  the  board  by  the  president  or  vice-president  or 
any  other  two  directors.     Copies  of  these  statements 


ii(J 


1J.\NKIN(;    rUIN{  IPLKS 


*>ast  be  sent  to  eaeh  .slmieliolcler  of  tlie  bunk  and  to  the 
Finance  Minister. 

Tlie  directors  must  also  submit  to  the  shareholders 
such  further  stattineiits  of  the  affairs  of  the  bank  as  the 
shareholders  may  re(iuire  by  by-law  regularly  passed. 

28.  SharchoUh't's'  aiidit  (Section  .')(»,  all  new). — 
Shareholdeis  of  a  bank  shall  at  each  annual  general 
meeting  appoint  and  fix  the  remuneration  of  an  auditor 
or  auditors  chosen  from  a  panel  of  not  less  than  forty 
selected  by  the  general  managers  of  the  banks  and  ap- 
proved by  the  Minister  of  Finance.  Full  provision  is 
made  for  filling  the  vacancy  caused  by  the  death  of  an 
auditor  or  tlie  failure  of  the  shareholders  to  appoint  an 
auditor.  Written  notice  of  the  intention  to  nominate 
any  auditor  other  tluui  a  retiring  auditor  nuist  be  given 
at  least  twenty-one  days  before  the  annual  meeting; 
the  bank  must  cause  a  copy  of  such  notice  to  be  deliv- 
ered to  the  retirijig  auditor,  and  particulars  of  the  nomi- 
nation must  be  forwai-ded  to  each  shareholder  at  least 
fourteen  days  l)efore  the  meeting. 

Every  auditor  of  a  bank  shall  have  right  of  access  to 
the  books,  cash,  securities,  and  records  of  the  bank,  and  is 
entitled  to  recjuire  from  the  directors  and  oflRcers  such 
informatioj)  and  exjjlanation  as  mav  be  necessarv  for 
the  performance  of  his  duties. 

An  auditor  is  not  re(|uired  to  visit  any  branch  for  the 
purpose  of  examining  the  books,  cash,  securities,  and 
records,  but  he  may  do  so  if  he  considers  it  advisable. 
It  is  sufficient  for  the  purposes  of  the  audit  if  he  has 
access  to  the  returns,  statements,  and  the  like,  which 
are  sent  to  the  head  office  in  the  ordinary  way.  He  must 
at  least  once  during  the  year  check  the  cash,  securities, 
etc.,  at  the  chief  office  of  the  bank  and  at  those  branches 
at  which  he  may  consider  it  advisable. 


Tin:    HANK     A(T 


•27 


The  auditors  shall  iiiakc  a  ivport  to  the  share- 
holders: 

(a)   On  the  accounts  examined  l)y  them; 

(h)   On  the  checkin^j;  of  the  cash  and  securities ; 

(e)   On  the  statenuiit  of  the  afl'airs  of  the  hank  siih- 
mitted  at  the  meetinr; 
and  the  report  must  state: 

(a)  Whether  or  not  they  liave  ohtaincd  all  the  in- 
formation and  explanation  they  have  re- 
(juired; 

(h)  >Vhether,  iii  their  opinion,  the  transactions  of 
the  hank  which  have  come  under  their  notice 
have  heen  v>ithin  the  powers  of  the  hank; 

(c)  Whether  the  cash  and  securities  agreed  with  the 

hooks  of  the  l)ank;  an<l 

(d)  Whether,   in   their  opinion,   the   statement   re- 

ferred to  in  the  report  is  j)roperly  drawn  uj) 
so  as  to  exhil)it  a  true  and  coriect  view  of  the 
state  of  the  hank's  affairs,  according  to  the 
best  of  their  information  and  the  explanations 
given  to  them,  and  as  shown  by  the  books  of 
the  bank. 

This  report  must  accompany  the  statement  submitted 
to  the  shareholders  at  the  aimual  general  meeting. 

29.  Special  report  to  the  Min'mter  of  Finance  ( Section 
o6a,  new). — The  ^linister  may  require  any  duly  ap- 
pointed auditor,  or  any  auditor  whom  he  may  select,  to 
examine  and  inquire  s])ecially  into  the  affairs  and  busi- 
ness of  a  bank,  and  the  auditor  so  selected  shall,  at  the 
conclusion  of  his  examination,  report  fully  to  the  Minis- 
ter the  residts  thereof. 

30.  Dividends  (Sections  57-59). — These  sections  deal 
with    dividends    and    tlic    method    of    their    payment. 


28 


hankim;   phinc  iitks 


The  directors  are  permittnl  to  deelare  (iiiarterly  <»r 
half-yearly  dividcmls,  hut  no  dividend  or  homis  shall 
he  deelared  which  will  impair  the  paid-up  capital  of  the 
hank,  or  which  excee«l.s  a  rate  of  H  per  cent,  uidess  after 
payin^r  the  same,  and  provi<lin;r  (',„.  „||  |,„,|  ^^^^^\  d„uhtful 
dehts,  the  hank  has  a  rest  or  reserve  fun<l  ecpial  to  at 
least  ao  per  cent  of  its  paid-up  ca|)ital. 

Previous  to  the  i)aymenl  of  any  dividend  or  bonus 
the  tlirectors  nnist  ^rive  puhlic  notice  for  at  least  four 
weeks  prior  to  the  date  fixed  for  i)ayinent. 

31.  Cash  reserve  (Section  00).— The  hank  must  hold 
in  Dominion  of  Canada  notes  not  less  than  40  per  cent 
of  the  cash  reserves  which  it  has  in  Canada.  Arrange- 
ments for  issuin^r  Dominion  notes  in  exchange  for  gold 
and  for  redeeming  them  are  made  at  the  branch  offices 
of  the  Dei)artment  of  Finance,  namely:  Toronto,  Mon- 
treal, Halifax,  St.  John,  Winnipeg,  Victoria,  Char- 
lottetown,  Kegina,  and  Calgary. 

32.  General  note  isftiie  and  eireulation  of  notes  (Sec- 
tion 01).— A  bank  may  issue  and  reissue  its  notes  pay- 
able to  bearer  on  demand  and  intended  for  circulation 
to  the  amount  of  its  unimj)aire(l  paid-up  capital.  Xo 
such  note,  however,  shall  be  for  a  sum  less  than  five 
dollars  or  for  any  sum  which  is  not  a  multiple  of  five 
dollars. 

33.  Additional  issue  for  moving  erops  (Section  01, 
sub-sec.  15-20).— During  the  usual  season  of  moving 
crops— that  is  to  say,  from  and  including  the  first  day 
of  Septemt)er  in  any  year  to  tlie  last  dav  of  Februarv 
next  ensuing— a  bank  is  allowed  to  issue  additional 
notes  to  an  amount  not  exceeding  15  per  cent  of  its 
combined  luiimpaired  ])aid-up  capital  and  rest  or  re- 
serve fund,  as  stated  in  the  monthly  return  to  the  gov- 
ernment   for  the   month    immediately   preceding   that 


Tin:    HANK    ACT 


30 


ill  wliifh  the  additional  amount  is  issued.  While  such 
excess  notes  nre  in  circulation  the  banks  must  pay  to 
the  Minister  of  Finance  interest  on  the  excess  at  a  rate 
iioi  exceediMg  5  j)er  cx-nt  per  annum,  the  interest  to  l)e 
calculated  on  the  amount  of  notes  in  circulation  for  each 
day  during  the  month,  as  shown  in  a  return  to  be  sent 
monthly  to  the  Minister.  This  feature  was  added  to  the 
Hank  Act  in  1{)()8  in  the  form  of  an  amendment  to  the 
Act  of  inoi. 

IH.  Central  ffold  reserve  insne  (Section  Gl,  sub-sec. 
.'J-13). — In  addition  to  this  special  provision  for  emer- 
gency circulation  during  the  croji-moving  period,  the 
new  act  provides  for  an  increase  of  circulation  at  any 
time  against  the  deposit  of  current  gold  or  Dominion 
notes  or  cither,  in  what  is  termed  the  central  gold  ic- 
serves.  These  central  gold  reserves  are  under  the  con- 
trol of  four  trustees,  three  appointed  by  the  Canadian 
Hankers'  .  Association,  and  one  by  the  Minister  of 
Finance.  It  is  the  duty  of  the  trustees  to  receive  gold 
coin  and  Dominion  notes  that  any  bank  may  desire  to 
deposit  with  them,  and  the  bank  mav  then  issue  extra 
circulation  up  to  but  not  exceeding  the  amount  of  such 
deposit.  When  any  part  of  the  amount  deposited  in 
the  central  gold  reserves  is  not  required  for  the  purpose 
of  issuing  notes,  the  surjdus  may  be  returned  to  the 
l)ank  by  the  trustees  upon  formal  a])plication.  The  cen- 
tral gold  reserves  are  subject  to  frequent  inspection  and 
audit  by  the  Department  of  Finance. 

.35.  Note  isxue  in  Britinh  colon ien  (Section  62). — 
Provision  is  made  for  issuing  notes  in  pounds  sterling 
or  in  dollars  at  agencies  of  a  bank  in  anv  British  colony 
or  possession  other  than  Canada.  The  denominations 
of  such  notes  are  limited  to  one  pound  sterling  or  any 
multiples  of  that  sum,  or  five  dollars  or  multiples  thereof. 


30 


BANKINCJ    I'RlNdrLES 


and  the  amounl  issued  in  this  way  must  be  treated  as  a 
])art  of  the  general  eireidation  of  the  hank. 

36.  Pledge  of  notes  proliUnted  (Section  (J.'J). — iV 
hank  shall  not  pledge,  assign  or  hypolheeate  its  own 
notes,  and  no  l<)an  thereon  shall  he  reeoverahle  from  the 
hank  or  its  assets. 

.'37.  Bank  Cireiilation  liedemptiou  Fund  { Sections  (J-t- 
G9). — Each  hank  must  maintain  with  the  ^Minister  of 
Finance  a  deposit  equal  to  at  least  5  per  cent  of  the  aver- 
age amount  of  its  notes  in  circulation  dm-ing  the  year. 
These  deposits  are  knt)wn  as  the  Bank  Circulation  Re- 
demption Fund,  and  are  held  only  for  the  purpose  of 
redeeming  the  notes  of  any  banks  which  fail  to  redeem 
their  own  issues  in  specie  or  Dominion  notes.  For  all 
notes  so  redeemed  the  fund  has  the  same  rights  against 
the  estate  of  the  failed  bank  as  any  other  holder.  In- 
terest at  3  per  cent  is  allowed  by  the  government  on  the 
fund.  The  amount  at  credit  of  the  hanks  in  this  fund  is 
to  be  adjusted  on  the  first  of  July  of  each  year,  in  such 
a  way  as  to  make  the  amount  at  credit  of  each  hank  ecjual 
to  5  per  cent  of  its  average  note  circulation  during  the 
preceding  twelve  months.  In  calculating  the  average 
circulation  the  average  amount  at  the  credit  of  the  bank 
in  the  central  gold  reserves  is  to  he  de<lucted. 

If  a  hank  sus])ends  payment  of  its  notes,  interest  ac- 
crues thereon  at  5  per  cent  per  annum  ^  until  the  day 
named  for  their  redemption,  of  which  ])uhlic  notice  is 
given  by  the  liquidator,  after  which  interest  on  the  notes 
outstanding  ceases.  If,  after  the  expiration  of  two 
months  from  tlie  date  of  suspension,  the  liquidator  has 
not  funds  to  redeem  the  notes,  the  Minister  of  Finance 
may  redeem  them  out  of  the  Circulation  Fund.    If  pay- 

'Tlie  provisions  oontninod  in  si-i-tions  G4-09  were  added  to  the  Riink  Act  of 
18!K).  at  llic  snsseslion  of  tlic  hi'.iiks  thenjsi'lv 's.  Tho  rule  was  rlians^cil  from 
(!  per  oi-nl  fo  5  p<'r  ceiil  in  liie  revision  of  1!MI0. 


THE    BANK    ACT 


31 


nient  made  from  the  fund  exceeds  the  contrihution.s  of 
the  failed  bank,  the  other  banks  must  recoup  the  fund 
l)r()  rata  for  the  amount  of  the  excess,  rev  \-cries  from 
the  liquidation  of  the  failed  bank  bein^,  of  course,  dis- 
tributed in  like  proportion.  For  this  purpose,  however, 
no  bank  shall  be  required  to  i)ay  in  any  one  year  more 
than  1  per  cent  of  the  average  amount  of  its  notes  in 
circulation. 

In  the  winding-up  of  a  bank,  if  satisfactory  arrange- 
ments are  made  for  the  redemption  of  the  outstanding 
notes,  with  interest,  the  Treasury  Board  may  return  the 
amount  at  the  credit  of  the  bank  or  such  part  as  may 
seem  expedient. 

The  Treasury  Board  will  make  all  necessary  rules 
and  regulations  as  to  the  management  of  the  Circula- 
tion Fund. 

The  jNIinister  of  Finance  may  take  legal  action,  if 
necessary,  to  enforce  payment  of  any  sum  due  by  a  bank 
to  the  fund. 

38.  Redemption  at  par  (Sections  70-71). — Banks 
are  obliged  to  make  arrangements  to  ensure  the  circula- 
tion at  par  of  their  notes  in  any  and  every  part  of 
Canada,  and  must  maintain  offices  or  redemption  agen- 
cies for  the  payment  of  notes  at  Toronto,  Montreal, 
Halifax,  St.  John,  Winnipeg,  Victoria,  Charlottetown, 
Regina,  and  Calgary,  and  at  such  other  places  as  are 
from  time  to  time  designated  by  the  Treasury  Board. 
Although  the  notes  of  a  bank  an  almost  invariably  pay- 
able only  at  its  head  office,  they  must  be  accepted  at  par 
at  any  of  the  branches,  agencies,  or  offices  of  the  bank. 

39.  Payments  in  Dominion  notes  (Section  72), — In 
making  a  payment  a  bank  must,  if  required,  pay  in  Do- 
minion notes  (legal  tender)  in  denominations  of  $1,  $2 
niid  $.'5,  not,  however,  cxccc.ling  $100  in  any  one  pay- 


iiZ 


BANKING    rUINCIPLES 


ineiit.  No  payment  in  Dominion  notes  or  notes  of  the 
bank  shall  be  made  in  unclean  or  torn  bills,  and  the 
Treasury  Board  has  the  right  to  make  regulations  re- 
garding the  disinfection  and  sterilization  of  bank  and 
Dominion  notes  by  the  banks. 

40.  Signing  of  bills,  etc.  (Sections  73-74).— Bills  or 
notes  issued  by  a  bank  are  binding  on  a  bank,  though  not 
sealed  with  the  corporate  seal  of  the  bank.  The  directors 
may  depute  an  officer  of  the  bank  to  sign  notes  intended 
for  circulation. 

If  both  the  signatures  on  a  bank  note  are  impressed 
by  machinery,  at  least  one  name,  together  with  a  distin- 
guishing device  and  number,  must  be  impressed  or  en- 
gr  vved  under  authority  of  the  bank  after  the  notes  have 
been  received  from  the  engraver  or  printer. 

41.  Counterfeit  notes  (Section  75).— Officers  receiv- 
ing public  moneys  and  bank  officers  must  stamp  or  write 
on  fraudulent  bank  notes  or  Dominion  notes  such  words 
as  "Counterfeit,"  "Altered,"  or  "Worthless,"  as  the  case 
may  be.  If,  however,  a  bill  is  wrongly  stamped  it  must 
be  redeemed  at  its  face  value  by  the  officer  at  fault. 


CHAPTER   IV 

THE    BANK    ACT    {Continued) 


42.  Business  and  iwwers  of  a  bank  ( Section  76-83) . — 
The  first  section,  76,  is  of  sufficient  importance  to  give 
in  full.    It  states  that  a  hank  may : 

(a)  Open  brunches,  agencies  and  offices. 

(b)  Engage  in  and  carry  on  business  as  a  dealer  in  gold 
and  silver  coin  and  bulb'on. 

(c)  Deal  in,  discount  and  lend  money  and  make  advances 
upon  the  security  of,  and  take  as  collateral  security 
for  any  loan  made  by  it,  bills  of  exchange,  promissory 
notes  and  other  negotiable  securities,  or  the  stock, 
bonds,  debentures  and  obligations  of  municipal  and 
other  corporations,  whether  secured  by  mortgage  or 
otherwise,  or  Dominion,  provincial,  British,  foreign, 
and  other  public  securities ;  and 

(d)  Engage  in  and  carry  on  such  business  generally  as 
appertains  to  the  business  of  banking. 

2.  Except  as  authorized  by  this  act,  the  bank  shall  not,  either 
directly  or  indirectly: 

(a)  Deal  in  the  buying  or  selUng  or  bartering  of  goods, 
wares  and  merchandise,  or  engage  or  be  engaged  in 
any  trade  or  business  whatsoever. 

(b)  Purchase,  or  deal  in,  or  lend  money,  or  make  advances 
upon  the  security  or  pledge  of  any  share  of  its  own 
capital  stock,  or  of  the  capital  stock  of  any  bank :  or 

(c)  Lend  money  or  make  advances  upon  the  security, 
mortgage  or  hypothecation  of  any  lands,  tenements 
or  immovable  property,  or  of  any   ships   or  other 

C— ^Tn— 3  33 


f 


34  BANKING    PRINCIPLES 

vessels,  or  upon  tlic  security  of  any  goods,  wares  and 
merchandise. 

The  bank  shall  have  a  privileged  lien  on  shares  of  its 
own  stock  or  on  dividends  for  any  debt  or  liability  of  a 
shareholder.  In  case  of  default,  provision  is  made  for 
the  sale  and  transfer  of  such  shares  within  twelve  months 
after  the  maturity  of  the  debt  and  after  due  notice  to 
the  debtor. 

Provision  is  made  for  the  sale  of  collateral  security 
held  by  the  bank  in  case  of  default  in  the  payment  of 
the  relative  debt. 

A  bank  may  hold  real  property  for  its  own  use  and 
occupation  and  may  sell  the  same  and  acquire  other 
property  in  its  stead  for  the  same  purpose. 

A  bank  may  take  a  mortgage  on  real  estate  or  per- 
sonal property  by  way  of  additional  security  for  a  debt 
already  contracted. 

A  bank  may  acquire  title  to  real  property  on  which  it 
has  a  lien  as  security  by  purchasing  the  equity  of  re- 
demption or  by  foreclosure.  No  bank,  however,  is  al- 
lowed to  hold  property  except  for  its  own  use  and  occu- 
pation longer  than  twelve  years. 

43.  Warehouse  receipts  as  collateral  security  (Sec- 
tions 84-90). — A  bank  may  lend  money  upon  the  se- 
curity of  standing  timber  and  on  the  rights  held  by  per- 
sons to  cut  or  remove  such  timber. 

A  bank  is  empowered  to  lend  money  to  a  receiver  or 
liquidator  appointed  under  the  Winding-up  Act  and  to 
take  security  in  connection  therewith. 

Power  is  given  to  advance  money  for  building  ships 
and  to  take  such  security  thereon  as  is  permissible  for 
individuals  under  the  laws  of  the  respective  provinces. 

Power  is  given  to  advance  money  on  warehouse  re- 
ceipts and  bills  of  lading. 


V 


kN\' 


THE    BANK    ACT 


85 


The  provisions  embodied  in  what  is  known  as  "Sec- 
tion 88"  have  proved  an  important  factor  in  the  indus- 
(histrial  and  agricultural  development  of  Canada.  The 
clause  permitting  loans  to  farmers  under  this  section 
appears  for  the  first  time  in  the  Act  of  1913.  The  full 
text  of  Section  88  is  given  below: 

The  bank  nmy  lend  money  to  any  wholesale  purchaser  or 
sliippor  of  or  dealer  in  products  of  agriculture,  the  forest, 
quarry  and  mine,  or  the  sea,  lakes  and  rivers,  or  to  any  whole- 
sale purchaser  or  shipper  of  or  dealer  in  live  stock  or  dead 
stock  or  the  products  thereof,  upon  the  security  of  such  prod- 
victs,  or  of  such  live  stock  or  dead  stock  or  the  products  thereof. 

2.  The  bank  may  lend  money  to  a  farmer  upon  the  security 
of  his  threshed  grain  grown  upon  the  farm. 

a.  The  bank  may  lend  money  to  any  person  engaged  in 
business  as  a  wholesale  manufacturer  of  any  goods,  wares  and 
merchandise,  upon  the  security  of  the  goods,  wares  and  mer- 
chandise manufactured  by  him,  or  procured  for  such  manu- 
facture. 

i.  If,  with  the  consent  of  the  bank,  the  products,  goods, 
wares  and  merchandise,  live  stock  or  dead  stock  or  the  prod- 
ucts thereof,  upon  the  security  of  which  money  has  been  loaned 
under  the  authority  of  this  section,  are  removed  and   other 
products,  goods,  wares   and  merchandise,  live  stock  or  dead 
stock  or  the  products  thereof  of  suhstantially  the  same  char- 
acter are  respectively  substituted  therefor,  then  to  the  extent 
of  the  value  of  the  products,  goods,  wares  and  merchandise, 
or  live  stock  or  dead  stock  or  the  products  thereof  so  removed 
the  products,  goods,  wares  and  merchandise,  live  stock  or  dead 
stock  or  the  products  thereof  so  substituted  shall  be  covered 
hy  such  security  as  if  originally  covered  thereby;  but  failure 
to  obtain  the  consent  of  the  bank  to  any  such  substitution  shall 
not  affect  the  validity  of  the  security  either  as  respects  any 
products,  goods,  wares  and  merchandise,  or  live  slock  or  dead 
stock  or  the  products  thereof  actually  substituted  as  aforesaid 
or  in  any  other  particular. 


36 


BANKINCi    PKINdrLES 


5.  Any  «uch  seiurity,  as  mentioned  in  tlic  foregoing  provis- 
ions of  this  section,  nwiy  be  given  by  tlie  owner  of  the  said 
products,   goods,  wares  and   merchandise,  stock   or  products 

thereof,  or  grain. 

6.  This  security  may  be  taken  in  the  form  set  fortli  m 
Schedule  C  to  this  act,  or  to  the  like  cflfect. 

7.  The  bank  shall,  bv  virtue  of  such  security,  acquire  the 
same  rights  and  powers"  in  respect  of  the  pro.lucts  thereof,  or 
grail,  covered  thereby,  as  if  it  had  ac(iuire«l  the  sa:ne  by  virtue 
of   a  warehouse   receipt:   provided,   however,   that  the   wages, 
salaries  or  other   remuneration   of  persons  employed  by   any 
wholesale  purchaser,  shipper  or  dealer,  by  any  wholesale  manu- 
facturer, or  by  any  fanner  in  connection  with  any  of  the  several 
wholesale  businesses  referred  to,  or  in  connection  with  the  farm, 
owing  in  respect  of  a  period  not  exceeding  three  months,  shall 
be  a  diarge  upon  the  property  covered  by  the  said  security  m 
priority  to  the  claim  of  the  bank  thereunder,  and  such  wages, 
SHlarles  or  other  remuneration  shall  be  paid  by  the  bank  if  the 
bank  takes  possession  or  in  any  way  disposes  of  the  said  secu- 
rity or  of  the  products,  goods,  wares  and  merchandise,  stock  or 
products  thereof,  or  grain  covered  thereby. 

All  advances  secured  under  Sections  86-88  have 
priority  to  tlie  claim  of  an  unpaid  vendor  unless  he  had 
a  lien  on  the  goods,  of  which  the  bank  was  aware.  The 
material  or  goods  on  which  a  bank  has  a  lien  by  ware- 
house receipt  or  pledge  under  Section  88  may  be  con- 
verted by  manufacture  without  the  bank  losing  its  lien 
thereon.'  In  the  case  of  the  non-payment  of  a  debt  thus 
secured  the  goods  may  be  sold  under  certain  specified 

conditions. 

A  bank  cannot  acquire  or  hold  any  warehouse  re- 
ceipt, bill  of  lading  or  pledge  of  goods  to  secure  any 
debt  unless  such  debt  is  negotiated  at  the  time  of  the 
acquisition  of  the  security  by  the  bank,  or  upon  the 
written  promise  or  agreement  that  such  warehouse  re- 


V  x 


THE    BANK 


ACT 


37 


(tipt,  bill  of  lading  or  security  would  be  given  to  the 
bank.  Such  liability,  however,  may  be  renewed  from 
time  to  time  without  affecting  the  condition  of  the  se- 
curity. A  bank  may  also  exchange  warehouse  receipts 
tor  bills  of  lading  or  vice  versa  without  affecting  this 
security. 

44.  Rates  of  interest  and  exchange  (Sections  91- 
1)4). — A  bank  may  stipulate  for  or  exact  such  rate 
of  interest  or  discount  as  may  be  agreed  upon 
and  may  receive  in  advance  any  such  rate,  but  no 
higher  rate  than  7  per  cent  shall  be  recoverable  by  the 
bank. 

A  bank  may  allow  any  rate  of  interest  whatever  upon 
deposits.  The  liability  of  the  bank  to  repay  money  de- 
p(»sited  with  it  is  not  affected  by  any  statute  of  hmita- 
tions  or  any  law  relating  to  prescription. 

A  branch  of  a  bank  wlien  discounting  bills  payable 
at  another  branch  may  take  commission  in  addition  to 
interest  to  an  amount  not  to  exceed  i  of  1  per  cent; 
minimum,  15  cents. 

In  discounting  bills  drawn  on  places  where  a  bank 
has  no  branches  this  rate  may  be  increased  to  ^  of  1  per 
cent ;  minimum,  25  cents. 

45.  Deposits  (Sections  95-98). — A  bank  may  receive 
deposits  from  any  person  whether  qualified  by  law  to 
contract  or  not  and  may  repay  the  same  to  such  person 
unless  the  money  is  lawfully  claimed  by  another.  Where 
this  conflicts  with  the  law  of  a  province  regarding 
minors,  married  women  and  other  persons  not  compe- 
tent to  enter  a  contract,  the  total  amount  received  from 
such  person  shall  not  exceed  $500. 

A  bank  is  not  bound  to  see  to  the  execution  of  any 
trust  in  relation  to  deposits. 

Provision  is  made  facilitating  the  transmission  of  de- 


f 


38 


BANKING    PRINCIPLES 


posits  not  exceeding  $500  in  case  of  the  death  of  the 
depositor. 

Official  checks  of  the  Dominion  of  Canada  shall  be 
cashed  at  par  at  the  branches  of  every  bank  in  Canada. 

46.  Purchase  of  the  asnets  of  a  bank  (Sections  99- 
.111). — These  sections  provide  for  the  amalgamation  of 
banks  and  set  forth  the  necessary  procedure.  Before  a 
bank,  however,  can  enter  into  any  agreement  to  sell  the 
whole  or  any  portion  of  its  assets  to  another  bank,  it  is 
necessary  to  obtain  the  consent  of  the  Minister  of  Fi- 
nance in  writing.  The  agreement  to  sell  and  purchase 
must  then  be  submitted  to  the  shareholders  of  the  selling 
bank  either  at  its  annual  general  meeting  or  at  a  special 
general  meeting  called  for  that  purpose,  a  copy  of  the 
agreement  having  been  mailed  to  each  of  the  share- 
holders at  least  four  weeks  previous  to  the  date  of  the 
meeting. 

To  carry  a  resolution  approving  of  the  agreement  the 
votes  of  shareholders  representing  not  less  than  two- 
thirds  of  the  amount  of  the  subscribed  capital  stock  of 
the  bank  are  necessary.  The  agreement  may  then  be 
executed  under  the  seals  of  the  banks,  and  application 
made  to  the  Governor-in-Council  through  the  Minister 
for  approval  thereof. 

If  the  agreement  provides  for  the  payment  in  whole 
or  in  part  in  shares  of  the  capital  stock  of  the  purchas- 
ing bank,  and  it  thus  becomes  necessary  to  increase  its 
capital  stock,  the  approval  of  the  shareholders  must  first 
be  obtained. 

The  approval  of  the  Govemor-in-Council  is  not  given, 
however,  until  the  IVIinister  is  satisfied  that  all  the  re- 
quirements of  the  act  have  been  complied  with  and  the 
necessary  publicity  given  by  the  insertion  of  notices  in 
the  Gazette  and  certain  newspapers.    The  approval  by 


^^^ 


10 

11 

12 

13 
U 
15 

16 
17 

U 

ig 

21 
22 


COURIERED   BANKS'   STATEMENT   TO  1 


(  MIIM    Sim  K 


I'l 

■-'1 


SV'.i'    <i1    H\SK 


1l:ink  i.(  M'  I'lr.  il 

llllllk  1.1   NiHil  ■'...ii:. 

Iliiiik  "(  llnli-li  N"rlh  Ami.  ric  i 

h;>lik  ..I    |..r..llll>. 

M,,l«nli»  llalik 

I^|II<)IH'    \lltl<'II!tt»' 

M.Ti  lialil-  ll;ilik  .'I  i'l li 

|lillli|ui'  rn.MTiiliili'  '111  <:iiiM.li 

I  rii'iii  Hank  ■■(  <'.iii:iil:i 

«  uimihan  Haul-  .■!  < '..inn  iiir 

l!i.>al  Hank  .il  (aiiaila 

MiiMiinii.ii  Hank 

I'ank  .il  llaTiiili..n 
Siaiiilaral  Hank  ..I  Cariaila 

Han.iuf  .I'll.i.liilaK.i, 

Hank  ..I  I  Miavia 

lrji|~ mil  Hank  iil  t'anaila- 

S.iMTi  iitn  Hank  of  Canaila 

Ml  lr.i|"liian  Hank 

1 1.. in.    Hank  ..f  (anaila 

\,.rilirrn  Cmnn  Hank 
:-l.  riniir  Hank  ..l  (  anaila 
r.ank  ..I  Xan.i.imr.  . 

W.'Vliiirn  Siurit\   Hank 


\i  II /"I 


(•■ipil  ,1 
?i(il.-»*rii  .  «l 


Ca-  Hal 
lanl   I  ,. 


l>.-,,tllNl,ll(»l    I        IC.IIIO.'IHI 

■huhi.ihn)   j        J.TJn,  I'Hi 

lll.KIII.IHMl    j         n.lXl.lKKI 


i.>i'>i>.i;iii'. 

In.l.tl<).IH!!t 

.'..I  a  II  1,1  HI)  I 

I 

'..IIIIII.IIINI    I 
|il.1HNI,IKHI    ; 

...imii.iKiii  I 

S.INDI.IIIIII    ' 
jri.lKMI.IIIMI 

.."..mil  1.1  mil  i 

! 
III.IKNI.mNI 

ii.iimi.iHiii 
.'i.iimi.iiiiii  '. 

l.imii.iHHi 
;,.iKm.iH.o 

lll.lHMI.IHHI 

:i.,  II  HI.!  II  III 
:;,inii.iiiit( 
'j.miii.iHiii 

i;.iiiiii,iiiKi 
a.imii.iid'i 
;.>,iiiiii.iNiii 


Amount 

t.f  ri  ..I  i.t 

r.-iN-r\<< 

luiitt 


l.Sliti.lit.l» 
,-,iMHl  IMMI 
I.INHI.INm 

...INKI.INH) 

ii.;M,7(«> 

l.iKNi.m^i 

.'i.lNNt.lHHI 
i;..l«III.ISKI 

ll.'iriii.iiiNi 

.•i.ii."..">.".<iii 

il.l.lKI.IHIII 
.',M7.J<«> 

:i.iiiil.'.iiiii 
:l,'i."i.>.7ii,i 

7.IIII.I.IKIII 

H.imii.iiiKi 
l.tmii.iiiKi 
L'.iHHi.iimi 

■J.MW.H"' 
I  L'-M.l.l«l 
I.17I.7IIII 

I'.ilj.jmi 


lii.miii.iiili) 
^•7111  131 
.'./ivl.l.vi 

I.M>l'>.lil'>li 
.'..IHII.IIIMI 

(.iimi.iiiMi 

^.'.miii.lKMt 
li.'M.TlMl 

I.IMHI.IIIIil 

.'i.lNDI.IItlll 
l.'i.llll.l.lHHI 
|l,.'.li<I.IIOII 

:i.iiiiii,ii;ki 
2.li(«..'il'i 

:i.in.">,!i:in 

:)/ill.:tiiii 
(i  'i.'L>.:i.ss 

ll.iNIO.IMIII 
I.IMMI.IHNI 

l,!i:i'.i,:i:iii 

■J.7sti,2Hl 
l,l:i:t,:H!> 

MH,2I.'> 

:ilii.liKi 


lll,(KIII,(ll> 

l.J.-i(i.tii.' 
lo.wM.nl' 

;j.!i'ji),iii« 

tl.lDKI.III" 
4,7<NI,III" 

t^'iAl.tlll.' 

II.IHI.I7  . 

.175,lll'i 

».:« 111,111 . 

rj,.'>(ui,iii ' 

(i,473.a:i-' 
:|,.'>IKMII'' 
:i,:«i2,.'il  ' 

M.INIII.III    I 

4,4ll,:«  ' 
7.(Mi(Mlli' 


l,2.Vl.llli' 
Ik-i0,li(«' 

:«ii),iiiii> 

4(l,()ll<' 

(k'l.iiii" 


in 

II 


II 
II 


III 
1.' 


I.' 


iMi,siii,,iii,r,  I  iiM'.HM"'i«  I  liri.:.ai,l.'>:«     Hw,«.W,>t:i ; 


in 

rirrlllalli.fl 


ii.iHM.aj>* 
.'•,;!7.">.i'aii 
4,1111,4:1:1 

4,tlH,lll2 
,l,,'i(l7,iW.i 

i,!t:ii.iij"i 

.•i.H;tl,l71 

lt.!4,l7H 

4.lHlll.t7l 

i:j,it;ii..'i;i.'i 
Iii,:i2n,ii.«i 

4.7.vi,v«» 
j,.v..'i.:i!  II 

;Miiii,4ti:. 
:i,  1(111. in.'i 

0,.mH,f,i7 

2ii,:;i:i 

'tll.i:-.' 

.,tu:.,H2.-i 

;  ,ii.-.:t,.2H 

;,iilii,."iii.'i 

.■|Vi,7".' 

11)1,11711 


Hal    ilia. 

1.1  l>..ni. 
(;.iv   ali.r 
ili'.liniiMf 

iitl\  aliit-< 
fi.r  «n'  ItN, 

|.Ii>-IWlH, 

I'll' 


•.■,tiH4,i«'.'>  j 

:i7,l''.'i 

4.W,i):..'  1 

4.'i,.'iri 

,V'l,.'Mill 

.'i:i,.>'.ii 

2:t,i'i»  i 
:i.vi.''i.'2 
ai.iwi  i 

HI.  MIS 

l,siii,:iis 
jlii,.'ii'. 

.•).".,n.is 
i  I  I.I  1 1 
i!t;i.7l^i 

:w,:it!i 

L'll.'-i7:t 


Itiilnni'ia 

■  IlK'  t  1 

l'r<.\  inrinl 

(iuViTII- 

iiii'liU 


|>i  |u.>tl>  I  y 
ihi'  iiiil.lii  . 

|ia\  al  It' 
i.n  ifi-innnil 
III  ('uliltt)il 


l>.'|M~i|i»  1; 

till'  |>tr  In 

|.il>ti!<l<' 

nlliT  iii.lii'i 

iir  tin  ti 

ti^i'il  ilav 

111  (  UtlUlltl 


4  l.lli 


2,MI.:i<r> 
r.ii.."ij7 

■2i:i,ini-. 

ll.M'.ino  : 

7ll,ii.'i  i 

iii.K.'.i  ; 

i 

1.-iii.lr.7  ' 

•.'M'.117J  1 
Htl'.L'lil  I 

rt.'.iiM.jri  ' 
I.l7l.:.ii'i 
i>,i72,;iii  i 

liis,:iL'> 

l,L'7(l,lll.M 
;».!i-.':l  ' 

I27,.M7 
:r.l,:.7:i 

1  .llNil.O.Mi 


ik-i,74 1 

l(l,!«12 

l,:i:il.7:il 
l.Vi.Hia 

li2,l>1Hl 


41>.."i(«>..H>Ml    ! 

:l.,"i.n,:i7l  I 
:iH.iw.VHi»t  ] 

i;i.:iJL'.'.il"i  I 
it.iii,7(i:i  1 
'.i,li2(i,:(ii:l  ; 

M.JIHt.lOI    I 

l7.7.Vt,l22   i 

l,71.-i.!tV.  I 

I7,iiis.:i7:i 

7'.M7J,a7'.l  I 
:il,ini,2ic'  j 

l(l,M7l>,:W7  I 
lt,(IIH,7l» 

io,:i:iN,iK;t 

4,7ii7,l2fi 

Ii,|."i7.:!s7 

JO  .'idO.XIII 


2.!»:i7,r.l 
2.ii'Vt,7sl 

4.iilii.!»H 

2,i|.Vt.7l!t 

iir..i,.srM 

:tss..V4i) 


lMt,l4;i.4ri  6,7lll),(14ll  j     ;H,(I7.1..VI(1      .■|.-.H,.V<.'.,HMi      02l..147.:i 


ii;i,iviii,ii) 

lll,II.VI.li.'> 
l,7lt.VIIV 

Ti.miM 

•Jii.777,41 

•.'n,n7H,'ii 

i:i,:iiHl.Mii 

;tN.ii.Vi.l.- 

ii,:MMi,iu 

2N,i:Mi.:iii 
>«7.:w.-i,7i 
7l,»2:i,7ti 

:i'i.u-..!ij 
•.•».;«iH.:i? 
2:i,i2i,*i: 

1(,H7I,.'.I 

2!'.><7h.ih 
:tl,li4ii.i*> 


.■■..Vix,!!: 
11,(1 1  :i,7'. 

7,iMi7,(i: 
t.ii.'id'i' 

>l(i,.">i 


:i4:i,(i! 


.\-si:is 


f urr.nt  ('...lil  ami  Sul.- 
.-iiliarv  (  "ill 


r)o:iiiniiiii  N'lil^'.^ 


I   t,; 


\  \Mr  111    11  WK 


In  i;i-.- 

( 'anaila         uii.'n 


T..lal 


III  !-;is- 

Caiiaila         »liirr 


I  Hank  ..(  Mi.ntnal 

■J  (^1.    .■■■  Hank 

:i  Hank  III    \ii\.i  Sii.lia 

I   I  Hank  "f  Hrili-li  Ni.rlli   Slmri.  a 

.-.  I  Hank  i.f  'l'..ri> 

I,  Mi,l«.n-<  H.ink         i 

7   i  I'aniiu''  N'ali'.nal.'  1 

s  M,  rii.anls  Hank  ..IC'an'i.la        ' 
tl  I    Han. tui' rrovini-ialr  lilt  ('anaila; 

1(1  Inion  Rank  ..f  r'ana.la  j 

II  Caiia'lian  Hank  .if  (  "..ninifrr  ■  . 

1..  lii.yal  Hank  iif  ('an.iili 

|:{  Mi'iiiiiii.in  Hank 

II  Hank  '.(  If;iiliill<m. 

!.■,  -I  iriiiaril  Hank  of  C'anatlil 

Ui  HamiiK-  (I'Um'hi'laKii 

17  Hank  nf  Ollawa 

IN  IriirxTiiil  Hunk  of  Piinuda   . 

19  SovciriKn  Hank  of  Canada. 

21)  .Mi-tropolitan  Hank 

21  '  Home  Bank  of  Canada- ..  . 

22  Northern  Cri»wn  Rank 

2:t  .•^t.rlinu  Rank  of  Can.'idn 

24  Bank  of  Vancouvi'r.  , 

25  I  Wi-yhurn  Si'i'urity  Bank 


7,i'..-.1.0fi3 

:;7.-i.vw 

2.iiM(.s02 

si»i,:i.vi 

s(i:t,ii7'.i 

i      .•.(i2.4'.tili 

!      I.-..-.,:i..-J 

I  1,  ;.><I.I(I7' 

.-I't.CiM 


3,07li.-'"i7  111,722.2211 
I     ;t7.-i.  vtH 

2,li'.tl,'VI2    4,I7H,4M 


ii.i,im; 


S.I.VI 


niiH,.Mii 

sii:(,ii7'.> 

.•|(12,l!»l 


iii;i.7i'.-"i 

7.".ll,illl(i-  2,l;i'.l,l'.l7 

,-.y,ii:H 


7H().i.vtl  :if*."),7:H 
.■..:i22.i'.(i:i,  2.1XI.'">(i.S 
l,s!lti,7s7    4,937 ,9(»n 


I,Ci-I4,!MIh' 
7:i!l.s.'i!l 

r)7.s,(M2j 

:«Mi,."i2i 
l.(i:t:),|i:t 
l,(iMi,.-i27 


i(i.-i,:t<»ti 
ns,222 

2v>i,S42 

.■i7,:ils 
2l,.-)(i!l 


474 


I,I(i(i,1SS 

7,.->(M.2il 

(),s;n,(ii»(i 

l,iit.',,:ts 
7:i'.(,s.v.i 
■i7.s,(l.12 

:!iMl..-i21 
I,ii:U,li:f 
l,(iK(l,."i27 


I(l,474,2<il 
7ai,7s.s 

r.,5C.2,2HN 

2,W'H,il'vl 

;t.s7(),c.i7 
;t,(u:i,!ioi 

l..-i:u,.-i:i(il 
,-i,12:t,17l* 

;k)H,24i| 

».('.12.."il.'> 
lii,:<ii:i.r.iil 
II,f«(i:!,77s 

.-.,-|IS,(lI4 

:i,:f2I.liM 
2,1(1(1,214 

I.97H.2HI 
2.Hs:t,(i70 
1(I,S19,4C> 


4,211 


Toil 


10,474  JIM 
7:tl  7v> 

2,99*- 1  HI' 
:t,s7(i,iil7 
:t,i>|:i.'KH 


*I  2  5 

if 


7tMI,(NNI 
121,(1(1(1 
244,791) 

l,4:t(),74N 
22X,()(I(I 
2(19,11(1(1 


=  J 


i. 

& 


1,MIS24     KMUXKI 

.•■,12:;  17t     :i2.-i,(KI() 

;t0^.2l4       .■>2,ll(l(l 


12,(mCi: 


I(r.,:»90 
9S.222 

2'<s,M2' 

.-17. .-.I  Hi 
2 1. .'.119: 

12.ti.")Ci 


Total 


•9  I:t,.->!H»,17(I42,172,949 


ri97,:t2(i 
8t>.t,0.->(l 

S73,70:t 
(ii;!.(l44 
22(),(H.') 

73,I7(i 


(il 

!,tii-' 

17:. 


i2,:.7(i 

1.1,91)l 

.:«.9.-.:t 


.'i,:  n,(il4 
:t,:  'l.lOl 
2,1  i(i,214 

1. 9  S.2XI 

2„s  4,079 

l(l,Ki!),462 


()97,32fl 
.S(a,050 

K7:t,703 
(il3,044 
220,r>4.'V 

7:j,I70 


lHI,9«»,(i:t,->!      17,().Vi;  91,iip.(l9: 


210,000 

7:!M,.MI() 
.•l7S,l¥KI 

2li(l,ll(NI 
l.VI.OtX) 
KIO.UUO 

123,300 
IS.-),^^ 
:)2ti,3,V) 

27,32<) 
.■)I..tO(I 
S9,l'i(KI 

114,(><i3 
.'i3,747 
37,1'Vi 

1.3,00  I 


0.(iiri.:i33 


Notm 
of 

otlllT 

hunks 


1,913,121 
14(i,2:V4 
7.>4,(HI.-i 

311,272 
3(W,41S 
:M9,S92 

42H,l9.-i 
74(i.:l97 
2(IS,9(I7 


I>riH>Mit> 

3 -.5 

Chi'iiui'rt 

t?Si 

atiil  t'til. 

on 

x""? 

<litf 

olliir 

liA 

frnrn 

linnks 

otlit-r 

~-~ 

1  iinkM 

in 

5M 

Caiiutlit 

Dui- 

from 

l.ankK 

and 
I  aiik^K 

'orri«- 
fiondrlit'. 

in  thi' 
liiiti'd 

KinK. 


4,4:l.-i.  -■7 

91i'i.oi4 

2,(i:ri,'->99 


1, 12 1. (Ml  I 

2,4:t9.:VHij  i2s,ii;Ki 

1.9H7,(>.'i(i 

N20.'.'7I 

3„M(i,ll(19 

49.a,2l:V 


70S,l):«)    2,.">72.2H.-.i, 
l.l7.-i.274|  .■.,9(il.2-'(i 
2,.Wl,7:t9    .".,27(i.."v42 


I  l.:i97,9 

CI 
29S,2tC.     l,l(I.S,IMi(l 

9.-i,42(l 

(iVl.sM 


2iM:i:i 

K,l(ll 

22,129 


.■i4(1.9llH 
3l9.ii:iii 
23.">,32(l 

!99.(IC..". 
411,129 
(i23,s:j.- 


104,77C. 
III.IMC 


2.2(i'S. !.'.:< 
1.49ii.-"il'« 

1,h7S,S09, 

l,(.,-)n.47l 

1  722.HMI 
4,243,9S(i 


321.:l' 
401,0911 


|Ci.-.,3« 
i:<ii.o.li) 
3(1,410 

C,31o|        l(i,2:i9 


I.IIS,I79 

;t92,">."i: 
i:t.-i,il2 


(i7,2.">(i 

2.94N 

(IIKMKII 

i:<(i,40l 

2,H.SI 

11,973 


27(i,l:tl 
19(1,12; 

:t:!s.729 
:U9.I97 
1.14,791 


J)il 

froi 

likrt   I 

l.aiik 

corn 

poiidi 

t'W 

whr 

than 

Cam 

and  r 


I. -1.4,4  It 
l()l,li:tH 

102.2.'i2 

10.000 

121,124], 

91.S731 


27,9-20 

.VI  1.9 17 
I9l.l47i 
.3.-i9,lS3 

l:«),2.-iS! 


.■kSl 

4,r.i9.3:is 


.-►l,(i43 
99,91.-i 


.■.,31.1' 
311 

l,(m: 

1,(V41 

l,l.-.; 
1.2'.i: 

411 
.vi; 


80 
4.43 

2,1S 

l,2(j 

17 
92 

7 

.VI 
2,0(1 

It 

1 


l2.!HI.S,2(i3J47,M9,94.-)    13S,100  :«,.->!«.lk">l     9,2()l,2!«i 


TO  THE  DOMINION  GOVERNMENT -JULY,   1913 


iIm'  |mi   tl' , 

|ill>ttMr 

tidfr  iiiitifi* 

iir  nri  n 

tn.il  llllV 

111  ( 'uimilu 


ii;i,ivio,iiii 

|ll,II.VI.Ii.VI 
l.7H.-i,IIHI 

•.'■J.IKH  .AW 
•.•Ii,777.4ll 
•.'ii,i>7x,'i|7 

i:(.:)iN),Nim 

:m,i'i.-i:>,i.'iIi 

ti.:ni*i,ii;fl( 

»,i:<ti,:tii:t 
K7,:(M.-i,7«i 

7l.»t2:j,7IM* 

,t(i.»i5.n.'» 
2».:Mi«.:t77 
i>:i.t24,i)a:i 

I4.M71..M3 

a'.i.H7H,(»4« 
:h,ihii.»i'*7 


.-•,.vm,KM) 
n,lll3,7tM 

7,(Mi7,(l'iH 

4.ci.'>ll,'>71 

Mil,"  (Mi 

.'HII.IMI 


I.IAHII.ITIFH 


Ih.ll 

III  Citiiti'hi 


I 

••'7.. MS,  urn 

11. Mil. MM 

2.l.'>l.l;.':t 


U7..i;t;t 

4.Vi.JI.> 
111  .•.7.',.«i7 


l...iili»  frtilii 
.iittir  liiiiik^ 

III  (':il|j|ilil 

wiiri  tl. 

lilt  IlKllhlt 

I  ill<  rt- 
I   tli^i'iiuni*'*! 


fl2l,M7,;«>t>l  I     »0,«llll,l'.M 


|h-|HH<|ll« 

inuili-  lt> 

lllltl  t  ullllH'l'" 

llll.'  I.I 

nll.ir  lilllk* 
III  (  uliHtla 


l,l.ll>..Mts 
J.-iii.mi'i 
liMi.:i|:i 

iN.O'.Mk 
74,7MI 
9I.7.M 

.■i.ii:vt 

MVI.iHII 

l.i^l.'i 
:u(.i>7ii 

77h.!Is7 

:>!).•>,  wi."! 

UM.t»:t-'i 

1.2117 

7tH),(MU 


4:(7 
144,2211 


;ti.t,77i) 

2.tl2H 
7..-.i:i 

l<)U,42;i 


tl.l)(l2.".i.'«7 


Dim-  t" 

liiiiik.^  iiiiil 

I  riiikifK 
i'urri'M|M)iM|. 

I'fllM   III   till- 
I   lllli'il 

Kiiicitiini 


42.211) 

avi.a.Mi 

fl2,.-.7l 

12.122 

2:«,7l<lt 

l..V«l 

:t!t:t,7ii;i 
1 .2«2.W>1I 
l,2l)l,IWM 

l.ni.iiHO 

(l.lXi.tMUt 
22H.41H 

7.">.22<) 
21.-.,i»2<l 
(M2,II71 

l.lMNt.lKl 
ll2»,H7:t 


:K7,or) 
7:t,lll»l 


l>W  III 

I  unk»  iiriil 

t  iihkiiiii 
('iirri'i»tM>ii<l- 

I-MIK   I'llW" 

ulliTi-   Olilll 

la  ( 'uimitii 
»r  ihi'  I     K 


HI.'i.2IM 
H,7til 

.'iin.iHi 


111,112 


DilU 
imytililt' 


Arrt'Iil- 

ttlHf* 

Miiik'r 

li'tit-ria  of 

inilll 


l.»>21'.»7>« 
li(.i)l:l 


4lrt,7:«i     .•..tM.V7(t7 
1 1. vim;) 

1N)I,:«H)  i   . 


:(2.2i.'i 

IW2,2»(t 
II 17, til  12 


7U.72II 
.l,:iN.^.Miil 
2.111,112:1 

Ii7,;i<i2 
.Vi.tai 


7."ill.ll<l."i 
I2><.i'«-Vi 

i(V4,:m.'i 


n..vu.»wi 

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4.i:«».2it:i 
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10,9.W.l'2l 


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29,i;h,i:mi 

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:t:i.l.-i7,204 
40,242,.38« 


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1,7h:I.9(13 

882.2(19 


89,2(Mi,23.'> 


(179,798 
.(i-.M..1:|8 
,iil'.i,9.-|7 

8(),I>4I> 


149    3.7:1^.229  179„'.94 

214,8.17    4,l(ii...'>l»  (124.079 

100,724    ;i,31il.(i(12|  417.7112 

727.383  182.8781 

L.Wii.lU  118.924 

l,,-ii:(.l(18  U8,:M9l 


S.->8,429.(Hl942.9ai),.'>l3 


1,240.17(1 


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8:i.i:i3 

3.'..4.'i« 


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286,824 
97,HH,') 

8."i,.'i(i.'> 


17,o:i.i 
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I0,:i8.'> 
70,372 

19,097 


'1^ 


.•),998.:t4;. 


48.9."iO 
3,I(M.977 
l,l4:l,.Vt(l 


9,'ifi.:t.W 

81,210 

1,983 


43  219      ;i.'i,ii:i.'> 

82.9J'l        .")9.4(l.-> 
9S,220      4.">(i,7N4 


44.088 
I  ,(>28 

1.800} 


2,94.-..4.i:i  7(1(1.28;) 
2.01(1.9(12  l:«),(il3 
l,0.-il,U3        102.978 


1,4IMI 
0.931 


97,«!i9 
l,'i,(K)0| 


8IO,.-.IO 
l,(l(V4,7()3 
2,093,027 


37S..-,7S 
(11t9,44.' 


42.382 
178,170 
193.802 


82.8.'i:i 


2.111.836 


4.3.121 .3M 


1,291,208,1,340,11)0  2,471,170 


3,W.24,i 
;ill.C.91 

.■>7.729l 

I  I8,ll0(l| 


3.438 


aim.i.i:) 

14,U(i8 

143,471 

1.000 

43.49.'> 

.3..174.23I 

3,i:«) 

70.403 
.'■>1,729 
.'.(i..)!).". 

:)0.0I)9 


7.'..;)6H..'>40, 
2.".O„'>70.288; 
177,121,9.12 

77.48.3.471) 
4.'-.,ii.'.,2:h 

44,2K9,774 

:t2.2il.o;)."i 
.-):),o.'2.l(H' 
79,720,7931 

4.(K)I..".1| 
12,70:),22't 
13,0.19,274 

18,.i:V2.993 
9.02.1.'178 
3,07(1.011 

|.;)6.1,l()4 


14 
1.1 

in 

17 

18 

19 
21) 
21 

22 
23 
21 

2.1 


40,80«,010ll  1,134,24(1}  9.9!2.824l  I,.1l9..117,013j 


T.   C.   BOVILLE 

Deputy  Minuter  of  Finance 


n 


8 


m 


V( 

th 
th 
ex 

nil 
foj 


or 

c&\ 

be 


ho\ 
qui 
nee 
tlie 


TIIK    BANK    AC" 


ut   t  will  then  be 
w.Jer-in-Council 


the  Governor-in-C'ouncil  of  the  ugrt 
evidenced  by  a  certified  copy  of  the 
approving  thereof. 

The  notes  of  the  siclling  bank,  of  course,  cannot  be 
reissued,  but  must  be  called  in,  redeemed  and  cancelled 
as  (piickly  as  possible. 

47.  Jictunis  to  Government  (Sections  112-114). — 
Hunks  must  send  to  the  Minister  of  Finance  a  statement 
at  the  end  of  each  month  in  a  si)ecified  form.'  The 
statement  must  i  e  signed  by  the  chief  accountant  and 
by  the  president  and  general  manager,  or  persons  duly 
authorized  to  act  in  their  stead. 

The  Minister  of  Finance  may  call  for  special  returns 
from  any  bank  at  any  time. 

A  bank  at  the  end  of  each  calen  ir  year  shall  trans- 
mit to  the  Minister: 

(a)  Dctttilcd  returns  of  all  unpaid  dividends,  bills  of  ex- 
changL",  drafts  and  certified  checks  outstanding  for 
more  than  five  years  and  of  all  balances  in  respect  of 
which  no  transactions  have  taken  place  or  upon  which 
no  interest  has  been  paid  during  the  five  years  prior 
to  the  date  of  sucli  return. 

(b)  A  list  of  sharohohlers  with  their  addresses  and  the 
number  of  shares  held  by  each. 

48.  Payments  to  the  Minister  of  Finance  upon  dis- 
solution of  a  bank  (Sections  115-116).— The  liquidator 
of  a  bank  must,  after  three  years,  pay  to  the  Minister 
of  Finance  all  amounts  due  to  shareholders  or  depos- 
itors remaining  imclaimed,  together  with  all  interest 
due.  The  government  will  hold  the  money  in  tnist  for 
the  owners  and,  in  the  case  of  interest-bearing  depos- 
its, will  continue  to  allow  for  six  years'  interest  at  the 
rate  of  3  per  cent  per  annum. 

'See  combined  statementM  of  all  banks,  6gure  8. 


RETURN   OF  THE  TOTAL  LIABILITIES 
CANADIAN  BANKS  AS  REPORTED 


Capital  authorized 

Capital  sub.si'ril'  .  

Capital  paid  u,  

Amount  of  rest  or  reserve  fund 

Rate  yer  cent  of  last  Jiridend  declared per  cent. 


$190,860,606 
118,190,960 
110,5*0,153 
108,959,833 


Percentaob  to 


Total     I.iabilitiea 
Assets'    to  Public 


14.50 
7.78 
7.07 
7.17 


1 

e 


10 


11 
u 

IS 


LIABILITIES 


Notes  in  circulation 

Balance  due  to  Dominion  Government  after 

deducting  advances  for  credits,  pay-lists, 

etc 

Balances  due  to  Provincial  (lovernnients.  . 
Deposits  by  the  public,  payable  on  demand 

in  (Canada 

Deposits  by  the  public,  payable  after  notice 

or  on  a  fixed  day,  in  Canada 

Deposits  elsewhere  than  in  Canada 

Loans  from  other  banks  in  C^anada,  secured, 

including  bills  redi.scounted 

Deposits  made  by  and  balances  due  to  other 

banks  in  Canada 

Due  to  banks  and  banking  correspondents 

in  the  United  Kingdom 

Due  to  banks  and  banking  correspondents 

elsewhere  than  in  Canada  and  the  United 

Kingdom 

Bills  payable 

Acceptances  under  letters  of  credit 

Liabilities   not   included   under  foregoing 

beads 


$99,143,411 


0,700,040 
34,075,590 

350,585,190 

6*1,347,388 
80,000,194 


Aggregate  amount  of  loans  to  directors,  and 
firms  of  which  they  are  partners 

Average  amount  of  current  gold  and  sub- 
sidiary coin  held  during  the  month .... 

Average  amount  of  Dominion  notes  held 
during  the  month 

Greatest  amount  of  notes  in  circulation  at 
any  time  during  the  month 


0,002,957 
14,228,085 


9,713.020 
21,109,142 
11,134,246 

8,537,905 


$1,275,297,207 


$10,105,316 
37,107,557 
91,050,478 

108,178,424 


0.52 


.44 
2.24 

23.47 

40.89 
5.70 


.39 
.94 


.64 

1.39 

.73 

.56 


83.93 


.66 
2.44 

6.03 
7.12 


14.97 
9.27 
9.14 
8.64 


7.77 


.53 
2  67 

27.96 

48.73 
6.79 


.47 
1.12 


.76 
1.66 

.87 

.67 


100.00 


.79 
2.91 
7.19 
8.48 


/  declare  that  the  above  return  has  been  prepared  under  my  directions  and  i»  correct 


We  declare  that  the  foregoing  return  is  made  up  from  the  bookn  of  the  Bonk,  and  that 
eial  position  of  the  hank;  and  we  further  derlare  that  the  Hank  han  never,  at  any  time 
per  teiil  uf  the  ranh  reaerree  uhich  it  ha*  in  Canada. 
this day  of. 19. 


AND  ASSETS  OF  ALL  THE 
TO  THE  GOVERNMENT 


On  the  Thirty-first  Day  cfjvly,  191.1 


ASSETS 


10 


11 


12 


13 


14 


15 

IG 
17 

18 
19 
SO 

21 
ii 
23 
24 

25 

2G 


Current  golil  and  subsidiary  coin: 

In  Canada,  $28,582,77tf/ 

Elsewhere,  $13,590,170 

Dominion  notes: 

In  (Canada,  $90,994,035. 

Elsewhere,  17,055 

Deposit   with  the  Minister  of  Finance  for| 

the  security  of  note  circulation 

Deposit  in  ci-ntral  gold  reserves 

Xotes  of  other  banks 

Checks  on  other  banks 

Loans  to  other  banks  in  Canada,  secured, 

including  bills  rediscounled 

Deposits  made  with  and  balances  due  from 

other  banks  in  Canada   

Due  from  banks  and  banking  correspond 

ents  in  the  United  Kingdom 

Due  from  banks  and  banking  correspond 

ents,  elsewhere  than  in  Canada  and  the 

United  Kingdom 

Dominion  government  and  provincial  gov- 
ernment securities 

Canadian  municipal  securities,  and  British, 

foreign    and    colonial    public    securities 

other  than  Canadian 

Railway  and  other  bonds,  debentures,  and 

stocks 

Call  and  short  (not  exceeding  thirty  days) 

loans  in  Canada  on  stocl^,  debentures 

and  bonds 

Call  and  short  (not  exceeding  thirty  days) 

loans  elsewhere  than  in  Canada 

Other  current  loans  and  discounts  in  Canada 
)ther  current  loans  and  discounts  elsewhere 

than  in  Canada 

Loans  to  the  Government  of  Canada 

Loans  to  provincial  governments 

Loans  to  cities,  towns,  municipalities  and 

school  districts 

Overdue  debts 

Real  estate  other  than  bank  premises 

Mortgages  on  real  estate  sold  by  the  bank.  . 
Bank  premises,  at  not  more  than  cost,  less 

amounts  (if  any)  written  off 

Liabilities   of  customers   under  letters  of 

credit  us  per  contra 

Other  assets  not  included  under  the  fore- 
going heads 


according  to  the  books  of  the  bank. 


Percentaoii  to 


Total  I  Liabilities 
Assets      to  Public 


$42,172,949  2.77 


91,011.091 
0,610,333 


12,908,203 
47,819,945 

138,100 

3,588,051 

9,201.280 

24,892.762 
10.958,221 

22,584.905 
73.697.295 

67.99  ,255 

89,266,235 
858,429.069 

42.960.513 


2.111.836 

43.121,384 
4,291,208 
1.340.100 
2.471,178 

40.896,616 

U.  134.240 

0.912,824 


5.99 
.44 


.85 
3.15 


.24 
.    •*! 

1.64 
.72 

1.49 
4.85 

4.48 

5.87 
56.49 

2.83 


.14 

2.84 
.28 
.09 
.16 


.73 
.65 


3. SI 

7.14 
.52 


1.01 
8.75 


.28 

.72 

1.95 
.86 

1.77 
5.78 

5.SS 

7.00 
67. S2 

8.87 


.16 

3.38 
.34 
.10 
.19 

S.21 

.87 

.79 


$1,519,517.013  100.00      119.15 


Chief  Accountant 
to  the  best  of  our  knowledge  and  belief  it  is  correct,  and  shows  truly  and  clearly  thefinan- 
during  the  period  to  which  the  said  return  relates,  held  in  Dominion  notes  less  than  forty 


President. 
General  Manager. 


dual  BtataiMBt 


41 


42 


BANKING    PRINCIPLES 


Liquidators  of  banks  are  also  required  to  pay  within 
tliree  years  to  the  Minister  of  Finance  an  amount  equal 
to  the  excess  of  the  outstanding  notes  in  circulation  over 
the  amount  at  the  credit  of  the  bank  in  the  Circulation 
Fund,  the  same  to  be  held  by  the  government  for  the 
purpose  of  redeeming  such  notes. 

49.  Canadian  Bankers'  Association  (Sections  117- 
124). — In  the  event  of  the  suspension  of  a  bank  the 
Canadian  Bankers'  Associatior  is  entrusted  with  the 
appointment  of  a  curator  who  continues  to  supervise  the 
affairs  of  the  bank  until  it  resumes  business  or  until  a 
liquidator  has  been  appointed  to  wind  it  up. 

The  association  may  make  by-laws,  rules,  and  regula- 
tions respecting: 

(a)  All  matters  relating  to  the  appointment  or  removal 
of  a  curator,  and  his  powers  ami  duties; 

(b)  The  supervision  of  the  makin^^  of  tlie  notes  of  the 
banks  which  are  intended  for  circulation,  the  delivery 
thereof  to  the  banks,  the  disposition  made  of  them, 
and  their  final  destruction; 

(c)  The  custody  and  management  of  the  central  gold 
reserves  and  the  carrying  out  of  the  provisions  of 
this  act  relating  to  such  reserves. 

No  such  by-law,  rule  or  regulation,  however,  shall  be 
in  force  until  approved  by  the  Treasury  Board. 

50.  Insolvency  (Section  125).— In  the  event  of  the 
property  and  assets  of  a  bank  being  insufficient  to  pay 
its  liabilities,  each  shareholder  shall  be  liable  for  the  de- 
ficiency to  an  amount  equal  to  the  par  value  of  the 
shares  held  by  him,  in  addition  to  any  amount  not  paid 
up  on  such  shares. 

51.  Suspension  (Sections  126-131).— The  non-pay- 
ment in  specie  or  Dominion  notes  of  any  of  its  liabil- 
ities, as  they  accrue  for  ninety  days  consecutively,  con- 


THE    BANK   ACT 


43 


stitutes  a  bank  insolvent  and  suspends  the  working  of 
its  charter.  The  charter  shall  remain  in  force  only  a 
sufficient  length  of  time  to  enable  the  directors  to  make 
and  enforce  the  calls  on  the  shareholders  deemed  neces- 
sary to  pay  all  the  liabihties  and  to  wind  up  the  business 
of  the  bank.  The  total  amount  of  such  calls  is  limited 
by  Section  125. 

Shareholders  of  a  bank  who  have  sold  or  transferred 
their  stock  are  not  relieved  from  the  double  liability  until 
the  expiration  of  sixty  days. 

In  case  of  insolvency  the  payments  of  notes  then  in 
circulation  shall  be  the  first  charge  on  the  assets  of  the 
bank,  the  second  charge  being  the  payment  of  money 
due  to  the  Dominion  i>t  vernment,  and  the  third  charge 
tlie  payment  of  the  money  due  to  the  Provincial  govern- 
ment. 

.52.  Penalties  (Sections  131A-158).— The  remaining 
sections  deal  entirely  with  offences  against  the  act  and 
the  penalties  incurred.  The  majority  of  the  penalties 
are  applicable  to  banks  and  bank  officers,  but  the  follow- 
ing five  may  be  incurred  by  the  public: 

For  selling  or  transferring  shares  contrary  to  the  require- 
ments of  the  act. 

For  issuing  or  drawing  any  instruments  intended  to  circulate 
us  money  or  to  be  used  us  a  substitute  for  money. 

For  mutilating  or  defacing  bank  notes  or  Dominion  notes. 

For  making  false  statements  in  connection  with  warehouse 
rtceipts  or  bills  of  lading,  or  for  wilfully  disposing  of  or  with- 
holding from  the  bank  goods  covered  by  security  under  Section 
H8,  an  indictable  offence. 

For  using  the  word  "Bank,"  "Savings  Bank,"  "Banking 
Company"  or  any  equivalent  term  without  being  authorized  to 
do  so  by  the  act,  nor  can  any  words  in  a  foreign  language 
i  w  ith  a  similar  import  be  used. 


I    ! 

i  i 

I     i 


\\ 


44  BANKING    rUlNC'TPLKS 

The  principal  penalties  incurred  by  the  banks  or  their 
officers  are  connected  with  the  following  offences: 

For    comiuencing    business    without    a    certificate    froia   the 

Trciisurv  Boiuti. 

For  hoUling  less  than  40  per  cent  of  the  cash  reserve  in 

Dominion  notes. 

For  allowing  the  note  issue  of  the  bank  to  exceed  the  amount 

authorized  by  the  act. 

For  pledging  the  notes  of  a  bank  or  issuing  the  same  fraudu- 
lently or  during  suspension.  Both  f  bank  officers  and  the 
person  accepting  such  notes  comnnt  a  .  mdictable  offence. 

For  issuing  an   aiumal  statement  unsigned  or  without  the 

auditors'  report. 

For  acquiring  a  warehouse  receipt  or  bill  of  lading  to  secure 
payment  of  any  debt  or  liability  unless  such  debt  is  contracted 
ut"tl-.e  time  of  the  acquisition  of  tlie  security  or  upon  a  written 
promise  or  agreement  to  give  such  security. 

For    non-compliance    with   the    requirements    of   Section   89 
regarding  the  sale  of  goods  covered  by  warehoiso  receipts,  etc. 
For  not  selling  shares  subject  t     a  privilege  lien  within  twelve 
months  after  relative  debt  has  become  payable. 

For  buying  or  selling  goods  or  engaging  in  any  business  not 
authorized  under  tlie  act. 

For  payment  of  any  debt  or  liability  of  a  bank  during  sus- 
pension of  specie  payment. 

For  neglect  or  delay,  over  the  stipulated  time,  in  forwarding 
the   various    returns    re,,uired  by   the   act  to  the   Minister   of 

Finance. 

For  making  false  returns,  an  indictable  offence. 

For  giving  undue  preference  to  any  creditor  of  a  bank,  also 
an  indictable  offence. 

53.  Changes  in  the  statements.— The  Act  of  1913 
made  several  changes  in  the  headings  of  the  monthly 
and  annual  statements  submitted  by  the  banks,  of  which 
the  following  may  be  noted: 


thp:  bank  act 


45 


A  distinction  is  made  between  the  gold  and  Domin- 
ion notes  held  in  Canada  and  the  amount  held  else- 
where.    They  are  now  stated  separately. 

Notes  and  checks  of  other  banks  are  also  stated  sepa- 
rately. IJy  this  chantje  the  amount  of  notes  of  other 
hanks  held  in  the  tills  of  the  several  banks  can  be  ar- 
rived at,  and  the  exact  circulation  in  the  hands  of  the 
public  ascertained.  These  figures  have  always  been 
furnished  to  the  Canadian  Bankers'  Association  in  con- 
ficction  with  the  circulation  returns,  but  were  not  avail- 
able to  the  public,  luiless  asked  for. 

The  former  heading  "Bank  Premises"  now  reads 
"Bank  Premises  at  not  more  than  cost,  less  amount  (if 
any)    written  off." 

The  foregoing  changes  are  self-explanatory  and  call 
for  no  particular  comment.  There  are,  however,  sev- 
eral new  headings,  which  afford  interesting  information. 

"Deix)sits  in  the  Central  Gold  Reserve"  is  one  of  the 
important  headings.  The  nature  of  this  asset  is  fully 
explained  on  page  01. 

The  information  called  for  under  "Loans  to  Cities, 
Towns,  jMunicipalities,  and  School  Districts"  will  al- 
ways l)e  of  interest  as  showing  the  amount  of  temporary 
assistance  the  banks  are  rendering  to  municipalities 
and  other  public  corporations.  These  advances  are  made 
partly  for  current  expenses  in  anticipation  of  taxes,  but 
mostly  in  connection  with  proposed  bond  issues,  where 
the  by-laws  authorizing  them  have  already  been  passed. 
The  amount  of  bank  loans  to  municipalities  should  prove 
a  gofxl  index  of  the  future  trend  of  the  market  for 
mun,  ipal  bonds,  and  no  doubt  the  brokers  as  well  as 
the  municipalities  themselves  will  be  able  to  use  this  in- 
formation to  advantage  in  their  respective  positions  of 
Iniver  and  seller. 


BANKING    PRINClPLtlS 


li 


! 
I 


"Acceptances  under  Letters  of  Credit"  on  the  liabil- 
ity side  is  offset  on  the  asset  side  by  "Liabilities  of  Cus- 
tomers under  Letters  of  Credit  as  per  Contra."  This  is 
simply  a  Ixwkkeeping  entry  and  shows  the  contingent 
liability  on  letters  of  credit.  There  is,  however,  prac- 
tically no  risk  to  the  bank,  for,  though  it  is  directly  liable 
to  its  correspondents  for  the  amount,  these  acceptances 
are  drawn  against  bills  of  lading,  and  the  obligation  is 
further  protected  by  the  financial  standing  and  credit 
of  the  customer  himself. 

"Bills  Payable"  is  one  of  the  most  important  of  the 
new  headings.  Under  the  former  act  no  provision  was 
made  for  this  feature  of  the  banks'  foreign  business, 
and  the  few  banks  who  had  liabilities  of  this  nature  in- 
cluded them  either  under  "Other  Liabilities"  or  in  the 
"Amounts  due  Foreign  Agents  and  Correspondents." 
Practically  only  those  banks  which  have  a  large  busi- 
ness with  Great  Britain  and  Europe  have  any  items 
coming  under  this  classification.  Bills  payable  are  not 
defined  by  the  Bank  Act,  but  the  intention  is  that  the 
term  should  include  all  drafts,  other  than  demand  and 
sight  drafts,  drawn  upon  and  accepted  by  agents  and 
correspondents  in  Great  Britain  and  Europe. 

These  bills  originate  in  the  regular  conduct  of  a  for- 
eign exchange  business  and  are  based  upon  several  vari- 
eties of  transactions.  Some  of  them  are  thirty  or  sixty 
day  bills  sold  to  customers,  who  prefer  this  method  of 
remittance  to  that  of  purchasing  demand  drafts  or  cable 
transfers.  Others  may  originate  from  the  placing  of  for- 
eign loans  in  Canada,  while  others  may  arise  from  a  de- 
sire to  anticipate  a  change  in  the  rate  of  exchange.  A 
full  description  of  both  these  liabilities  will  be  found  in 
the  chapters  on  foreign  exchange. 


CHAPTER   V 


NOTE    ISSUES   AND   THE    BRANCH    SYSTEM 

'yi.  Monetary  s  if  stem. — The  monetary  system  of 
Canada'  consists  of  ^old,  paper  currency,  and  silver 
and  copper  subsidiary  coins;  the  latter,  however,  not 
being  legal  tender  for  amounts  over  $10  and  25  cents 
respectively.  The  unit  is  a  dollar  of  23.22  grains  of 
pure  gold.  Gold  coins  of  the  United  States  and  the 
British  sovereign  (worth  $4.86^)  are  legal  tender  for 
any  amount,  and  still  form  the  bulk  of  the  gold  reserves 
of  the  government  and  of  the  banks,  as  it  is  only  of  re- 
cent years  that  Canada  has  had  a  distinctive  gold  coin- 
age of  its  own.  Gold  coin  is  seldom  seen  in  circulation 
and  its  use  is  practically  confined  to  reserve  purposes 
and  international  exchange  operations.  Silver  is  used 
for  the  subsidiary  coins  of  the  denominations  from  5  to 
50  cents  and  copper  for  the  cents.  With  these  excep- 
tions, paper  currency  is  practically  the  only  form  of 
money  used  in  Canada.  It  consists  of  two  kinds,  Do- 
minion notes  and  bank  notes. 

Dominion  notes,  or  "legal  tender,"  as  they  are  often 
called,  are  issued  by  the  Dominion  government  under 
the  authority  of  the  "Dominion  Note  Act,"  which  per- 
mits an  unlimited  issue  on  the  following  conditions:  the 
^linister  of  Finance  shall  always  hold  for  the  security 
and  redemption  of  Dominion  notes  up  to  and  including 

•  See  text  on  "Money  and  Banking,"  Volume  VII. 

47 


48 


BANKING    PRINCIPLKS 


$30,000,000,  issued  and  outstanding  at  any  one  time, 
an  amount  equal  to  not  less  than  25  per  cent  of  the 
amount  of  such  notes  in  gold,  or  in  gold  and  securities 
of  Canada,  the  principal  and  interest  of  which  are  guar- 
anteed by  the  government  of  the  United  Kingdom. 
The  amount  held  in  gold,  however,  shall  never  he  less 
than  15  per  cent  of  the  notes  so  issued  and  outstand- 
ing. As  security  for  the  redemption  of  Dominion  notes 
issued  in  excess  of  $30,000,000,  the  Minister  must  hold 
an  amount  in  gold  equal  to  such  excess.  The  total 
amount  of  gold  and  specie  held  by  the  government  on 
June  30,  1913,  was  $100,437,593,  of  which  $93,863,538 
was  held  in  connection  with  the  outstanding  amount  of 
Dominion  notes  on  that  date,  as  follows: 

Gold  held 
Total  amount  of  outstanding  circula- 
tion   $116,363,538 

Less  amount  protected  by  25%  of  gold.      30,000,000      $7,500,000 

Excess  over  $30,000,000  protected  by 

full  amount  of  gold $86,363,538      86,363,538 


Total  gold  held  account  Dominion  notes $93,863,538 

The  total  amount  of  gold  held  by  the  banks  at  the 
same  date  was  $37,944,392  (a  small  proportion  of  this, 
perhaps  3  or  4  per  cent,  being  subsidiary  silver) ,  mak- 
ing a  total  of  $138,381,985  of  gold  held  by  the  banks 
and  the  government,  or,  allo^ving  for  the  silver,  say 
$133,000,000.  This  amount  w  aj  represent  the  total  gold 
holdings  of  Canada,  as  there  is  practically  none  in  circu- 
lation among  the  public.  If  any  British  or  American 
gold  is  paid  out  by  tourists  or  others,  it  is  immediately 
exchanged  or  deposited  at  a  bank. 

The  total  amount  of  circulating  notes  in  the  hands 
of.  the  public  on  June  30,  1913,  was,  in  round  figures, 


NOTE  ISSUES  AND  THE  BRANCH  SYSTEM     49 

$127,500,000,  of  which  $105,700,000'  (or  over  82  per 
cent)  was  in  the  form  of  bills  issued  by  the  chartered 
banks,  the  balance,  $21,800,000,  being  in  the  form  of 
Dominion  notes.  These  figures  will  give  an  idea  of 
the  important  part  the  bank  circulation  has  played  in 
the  upbuilding  of  the  country.  Valuable  as  the  note  issue 
privilege  is  to  the  banks  it  has  proved  even  more  valu- 
able to  the  country,  for  to  the  banks,  equally  with  the 
railways,  may  be  ascribed  the  credit  for  the  phenomenal 
development  of  Canada  during  the  past  twenty  years. 

55.  Dominion  notes. — Dominion  notes  are  legal  ten- 
der for  any  amount,  and  may  be  redeemed  at  the  offices 
of  the  Assistant  Receivers  General  situated  in  the  vari- 
ous provincial  capitals.  They  may  be  issued  in  any 
denomination,  but  the  one  and  two  dollar  bills  are  prac- 
tically the  only  denomination  in  active  circulation,  the 
larger  bills  being  used  principally  by  the  banks  for 
clearing  and  reserve  purposes. 

The  government  statement  of  June  30,  1913.  shows 
the  following  amounts  outstanding: 

Provincial  and  fractional $769,426 

JJ 12,750,790 

J? 9,340,820 

n 109,717 

J^ 5,854.985 

.fJX 15,200 

J^ 2.880,000 

*1'""" 5,319,000      $36,274,538 

$500  Legal  tender  between  banks. . .  365.000 
$1,000  Legal  tender  between  banks. .  .  2.029,000 
$5,000    Legal  tender  between  banks.  . .  77,695,000        80.089,000 

$116,363,538 

nf  Kill^^'"  '^'■''  '^*'"}*^  ^  detlucted  about  $11,000,000  representing  the  amount 

C— VIII— 4 


50 


BANKIN(i    IMUNCirLES 


-'  \ 


It  will  be  noted  that  $8(M)80.0()0  arc  given  as 
"legal  tender  between  banks";  this  amount  consists 
of  sixjcial  notes  tbat  are  payable  only  to  chartered 
banks    in    Canada    and    used    by    them    as    before 

stated. 

From  the  figures  given  alwve  it  will  be  seen  that  {p86,- 
274,538  are  available  for  publi'  use,  but  the  banks' 
statements  to  the  government  at  the  same  date  shows 
that  the  holdings  of  Dominion  notes  by  the  banks 
amounted  to  $04,544,199,  or  $14,455,199  in  excess  of 
the  special  bank  legals,  which  leaves  the  amount  ac- 
tually in  the  hands  of  the  public  at  that  date  as  $21,- 

819,339. 

56.  Bank  note  issue.— By  the  Bank  Act,  Canadian 
banks  are  empowered  to  issue  notes  of  $5  and  multiples 
thereof  up  to  the  amount  of  their  unimpaired  paid-up 
capital  against  the  general  security  of  their  total  assets 
on  which  the  notes  form  a  first  lien.    All  the  banks  are 
required  to  insure  the  circulation  of  their  notes  at  par 
in  every  part  of  Canada.    This  is  effected  by  requiring 
each  bank  to  provide  known  redemption  agents  in  the 
cities  of  chief  commercial  importance,  namely,  Halifax, 
St.  John,  Charlottetown,  Montreal,  Toronto,  Winni- 
peg, Regina,  Calgary,  and  Victoria.    Every  bank  ac- 
cepts the  bills  of  every  other  bank  at  par  and  forwards 
them  to  the  nearest  branch  or  redemption  agent  of  the 
bank  of  issue;  hence,  every  day  all  over  Canada  the 
banks  undergo  a  severe  test  of  their  ability  to  redeem 
their  circulation,  no  matter  how  freely  it  is  offered 
for  redemption.     This  is  one  of  the  strongest  advan- 
tages of  the  system,  and  makes  the  circulation  perfect 
and  free  from'  stagnation.     The  circulation  thus  varies 
in  velocity  and  voUunc  as  the  activity  and  requirements 
of  the  country  demand,  revealing  to  the  experienced 


NOTK  ISSUES  AND  TIIK  BUAN{  II  SYSTKM      51 

hanker  tlic  conditions  of  trade  and  finanee  throughout 
the  country. 

It  is  important  to  renieml)er  in  considering  tlic  note 
issue  that,  in  the  tills  of  its  own  bank,  a  note  has  abso- 
lutely no  value  except  as  so  much  stationery.  This  en- 
al)lt.>  the  banks  to  carry  a  good  supply  of  bills  at  each 
branch,  as  they  do  not  become  a  liability  of  the  bank 
until  they  are  paid  out  over  the  counter.  This  is  a 
very  valuable  feature,  as  it  not  ojdy  allows  a  bank  to 
keep  a  good  supply  of  till  money  on  hand  without  loss, 
'Mit  it  enables  a  small  branch  to  meet  an  unusually  large 
iitmand  for  cash  either  in  the  way  of  repaying  a  heavy 
deposit  or  of  making  a  large  loan. 

57.  Security  to  note  holder.— To  prevent  the  charg- 
ing of  discount  on  notes  in  case  of  suspension,  notes  of 
failed  banks  bear  interest  at  the  rate  of  5  per  cent  per 
annum  from  the  date  of  suspension  until  redeemed  either 
by  the  liquidator  or  by  the  government,  and  each  bank 
is  obliged  to  keep  a  deposit  with  the  government  equal 
to  5  per  cent  of  its  average  circulation.  This  is  called 
the  Bank  Circulation  Redemption  Fund,  and  should  it 
ever  happen  that  the  assets  of  a  failed  bank  are  insuf- 
ficient to  redeem  the  notes  outstanding  at  the  time  of 
failure,  the  entire  fund  is  liable  for  the  deficiency  and 
the  other  banks  have  to  bear  the  loss  pro  rata.  This  fund 
was  established  in  1890  at  the  suggestion  of  the  banks 
I  themselves. 

The  note  holder  is  amply  protected,  first,  by  the  total 
assets  of  the  bank;  second,  by  the  double  liability  of  the 
Ishareholders;  and  third,  by  the  entire  redemption  fund. 
iThe  amount  of  circulation  outstanding  at  the  end  of 
Vune,  1913,  was,  in  round  numbers,  $106,000,000  for  the 
[\vhole  of  Canada,  and  to  meet  this  the  banks  could  show 
total  assets  of  $1,521,000,000  (including  5  per  cent  re- 


52 


BANKING    P1UN{  IPI.KS 


ilcmption  fund,  $7,.5(MM)(K)),  and  double  liability  $llrt.- 
()()(),0(M),  or  nearly  $78  assets  for  every  Hve-doHar  note 
issued.  Tbe  penalties  for  over  issue  are  extremely  heavv. 
It  may  l)e  noted  that  only  three  banks  have  a  circu- 
lation that  much  exceeds  the  total  redemption  fund. 

The  question  may  perhaps  he  raised,  why  should  all 
this  care  be  taken  to  protect  the  note  holder  as  against 
the  princip;.!  creditor  of  the  bank,  the  depositor,  but  it 
must  be  recoft-nizcd  t'  it  there  is  an  essential  difference 
Iwtween  a  note  holder  and  a  depositor,  the  former  being 
an  involuntary  creditor  and  Ihe  latter  a  voluntary  one. 
The  dejwsitor  becomes  a  creditor  of  his  own  free  will 
and  for  his  oAvn  benefit,  and  exercises  his  own  choice  in 
the  selection  of  a  bank.    The  holder  of  a  note,  however, 
receives  it  in  good  faith  in  payment  for  labor  or  mer- 
chandise and  should  be  fully  protected.    A  note  issue, 
to  fulfil  its  best  and  most  useful  function,  must  be 
absolutely  and  without  questioji  as  gotKl  as  gold.    One 
of  the  strongest  elements  of  security,  however,  is  the 
fact  that  the  notes  are  subjected  to  daily  redemption. 
A  Canadian  bank  is  prohibited  by  law  from  pledging 
or  assigning  its  own  notes,  consequently  the  only  way  it 
is  able  to  put  them  into  ciradation  is  to  pay  them  out 
over  the  counter.    It  would  be  fatal  for  a  bank  to  issue 
notes  except  with  due  regard  to  its  ability  to  redeem 
them.    It  is  seldom  in  the  interest  of  any  bank  to  hold 
or  pay  out  the  notes  of  other  banks;  as  soon  as  a  bill 
has  done  its  work  in  the  hands  of  the  public  and  has 
been  paid  into  another  bank  it  is  promptly  presented 
for  payment. 

58.  Elasticity. — The  most  admirable  feature  of  the 
note  issue  is  its  quality  of  elasticity.     In  every  country, 
more  especially  every  new  country  where  the  agricul-  a 
tural  interests  naturally  predominate,  the  alternations 


NOTE  ISS.es  and  THE  BRANTH  SYSTEM     «3 
"f  the.  «..„«„,,  and  ,|„.  ,„„^.^,i„„  „r  ,1,^  ,.„^i, 
™ltur«l  «„.  Iu,„lH.r,„K  I.r.»l..cl».  I,ave  an  i„.,,„rt.„t  in- 

ma,  a  the  machinery  „f  the  eirculation  system  i,  auch 

lu.    ,t  expands  .„,|  contracts  aut„n.atica  ly  accor^h'^ 

.  the  wants  of  the  country.    It  will  expan.l  to  pa/fof 

the  nmk,n«  of  bntter  and  cheese,  the  moving' oMhe 

rops,  and    or  hm,berin«  operations,  but  when  it  iZ 

|.e  fomie.  these  d,.tie,  it  will  contract  silently  and  with 

.Jt;:"in :.':.!;:''""'''"''  ^'^''•"  '""^  '''"^^  «'- 

It  ,.K.a„,  rc,p„„,ivc„c.,  to  present  i„crca,o  or  di„,i„„,io„ 
I.   .-k.  or  .1,0  ,l„y,  »,,o„,er  ri,i„g  or  falling.  .  .  .  eZmIv 

■--• .-. ;.  ^r/r.  :hXrt::c:s: :: 

vpun,!  or  to  restrict,  should  be  forces  at  work T  ^r  ^  • 
.V    .y         stream  of  loans,  deposits  and  payments. 

f  late  years  of  about  $8,000,000,  while  e'oh  moX 
hough  sarins  in  the  general  annual  increa      sWs  .' 

""".  ."ais.    The  tables  m  Figure  .t  are  compiled  from 

"'hij.     It  nmst  not  be  overlooked  that  the  figurX 


i 

i 

in 


hi 


54  BANKING   PRINCIPLES 

given  do  not  show  either  the  maxinmm  or  the  minimum 
amount  of  circulation  during  the  respective  months,  but 
simply  the  point  at  which  the  issue  stood  at  the  end  of 
each  month.  The  maximum  amount  of  circulati  >i)  dur- 
ing the  month  is  given  in  the  government  staten.  but 
the  figures  at  the  end  of  the  month  are  genera  i;  con- 
sidered as  the  nv  3t  satisfactory  figures  to  deal  wilh. 

60.  Annual  changes,— Vxyrure  3  shows  the  amount  of 
notes  in  circulation  at  the  end  of  each  month  from  Jan- 
uary, 1901,  to  January,  1913,  inclusive,  and  the  aver- 
age circulation  in  millions  for  each  year  of  the  twelve 

years  is  as  follows: 

Circulation  Paid-up 

Average       Minimum     Maximum  Capital 

1901                           50             45  Jan.           60  Nov.  67 

lona                          56             49  —             68  Oct.  73 

1903  .  ;    . .  .        60             55  -             71    "  79 

1904  62  57  —  74  Nov.  80 

1905  .....        64  58  —  79    —  85 

1906  71  61   —  86  Oct.  95 

1907  76  68  —  69  Nov.  96 
1908! 71             67  -             86    -  96 

1909           74  66  —  92    —  97 

1910           82  73  —  99    —  100 

iSll          90  77  -  112    -  108 

191g; 100  88—  120  Dec.  115 

An  examination  of  the  average  circulation  shows  a 
more  or  less  steady  annual  increase  from  $50,000,000  in 
1901  to  $100,000,000  in  1912,  and  there  is  only  one 
break  in  the  upward  tendency.  In  1907  the  average 
had  reached  $76,000,000,  but  in  1908  dropped  to  $71,- 
000,000,  a  loss  of  $5,000,000,  which  was  not  fully  cov- 
ered even  in  1909  with  its  banner  crops,  the  average 
for  that  year  being  $74,000,000.  Any  departure  from 
the  normal  in  the  monthly  course  of  the  circulation 
can  be  traced  to  seasonal  or  temporary  reasons,  which 
do  not,  as  a  rule,  affect   the  year  as  a  whole,  and 


CIRCULATION  OP  CANADIAN  BANKS 

Volume  in  Milliont  tu  reported  in  the  Government  Statement  a(  the 
End  of  Each  Month 

1901-191S 


Jan. 

Feb. 

Mar. 

Apl. 

May 

June 

July 

Aug. 

Sept. 

Oct. 

Nov. 

Dec. 

CapiUl 

1»U1 

45 

46 

48 

47 

46 

49 

49 

51 

56 

58 

58 

54 

67 

\90i 

49 

50 

52 

51 

51 

54 

52 

55 

01 

00 

65 

61 

73 

1903 

55 

56 

58 

56 

57 

59 

58 

00 

04 

71 

67 

OS 

79 

19U4 

57 

58 

60 

59 

58 

60 

60 

00 

04 

72 

69 

05 

80 

1905 

58 

59 

59 

60 

58 

62 

01 

02 

70 

77 

73 

70 

85 

1900 

61 

W 

06 

67 

04 

69 

08 

70 

77 

84 

81 

78 

95 

1907 

08 

71 

76 

73 

71 

76 

73 

77 

79 

84 

84 

78 

96 

1908 

07 

69 

09 

67 

08 

68 

07 

70 

70 

83 

80 

73 

96 

1909 

66 

67 

09 

67 

09 

70 

71 

72 

79 

90 

86 

81 

97 

1910 

73 

75 

78 

79 

77 

80 

81 

81 

87 

06 

90 

88 

100 

1911 

77 

80 

82 

84 

82 

89 

80 

91 

97 

106 

102 

102 

108 

mi 

88 

89 

96 

95 

94 

102 

90 

102 

104 

111 

116 

110 

115 

191.'i 

95 

97 

102 

98 

103 

ino 

99 

106 

111 

118 

119 

" 

118 

Difference  in  Millions  over  Previou*  Month,  1901-1913 
Decrease  shown  thus:    —2  {Minus  two) 


Jan. 

1 

Feb. 

Mar. 

Apl. 

May 

June 

July 

Aug. 

Sept. 

Oct. 

Nov. 

Dec. 

1901 

1 

2 

-1 

-1 

3 

0 

2 

5 

2 

0 

-4 

liMW 

-  5 

1 

2 

-1 

0 

3 

-2 

3 

6 

5 

-1 

-4 

I9u:i 

-  5 

1 

2 

-2 

1 

2 

-1 

2 

4 

7 

-4 

-4 

1!M)4 

-  6 

1 

2 

-1 

-1 

2 

0 

0 

4 

8 

-3 

-3 

1903 

-  7 

1 

0 

1 

-2 

4 

-1 

1 

8 

7 

-4 

-3 

mm 

-  9 

1 

4 

1 

-3 

5 

-1 

2 

7 

7 

-3 

-3 

\\m 

-10 

3 

5 

-3 

-2 

5 

-3 

4 

2 

5 

0 

-6 

t!N)H 

-11 

2 

0 

-2 

1 

0 

1 

3 

6 

7 

-3 

-7 

1!H)0 

-  7 

1 

2 

-2 

2 

1 

1 

1 

7 

11 

-4 

-5 

1910 

-  8 

2 

3 

1 

-2 

3 

1 

0 

6 

9 

-6 

-2 

1911 

-11 

3 

2 

2 

-2 

7 

0 

2 

0 

9 

-4 

0 

1912 

-14 

1 

7 

-1 

-1 

8 

-6 

6 

2 

7 

5 

-0 

]9l.i 

-15 

2 

5 

-4 

5 

3 

-7 

7 

5 

7 

1 

FlUURE  3 

6J 


56 


BANKING    PRINCTPT.es 


can  generally  In?  ascribed  to  purely  Canadian  causes; 
but  tlie  check  in  the  annual  increase  and  the  decrease 
in  the  volume  of  the  circulation  tell  a  different  and 
more  serious  tale,  generally  that  of  unwise  speculation 
and  its  inevitable  finale.     At  all  events,  the  reason  is 
international  and  not  national  in  character  and,  as  a 
rule,  arises  out  of  the  financial  ills  of  our  neighbor. 
The  panic  of  1907  in  the  United  States  and  the  conse- 
quent depression  in  business  during  the  following  years 
seriously  affected  the  circulation,  and  the  following  year, 
1909,  shows  a  curtailment  of  all  expansion  and  enterprise 
throughout  the  country.     A  similar  condition  will  be 
found  to  follow  all  such  panics.     A  reference  to  the 
years  1892,  1893,  and  1894  shows  the  average  circula- 
tion for  these  years  as  $32,000,000,  $34,000,000,  and 
$31,000,000  respectively,  the  latter  figures  showhig  the 
reaction  from  the  panic  of  1893. 

A  study  of  the  monthly  fluctuations  shows  that  from 
18C8  to  1891  the  lowest  point  in  the  circulation  was  gen- 
erally reached  about  the  middle  of  the  year  instead  of 
in  January,  which  is  now  the  lowest  month.  About  1889 
evidences  of  a  change  commenced  to  appear,  until  by 
1895  the  readjustment  was  completed,  and  January  l)e- 
came  the  largest  redemption  month,  the  circulation  then 
reached  its  lowest  point,  and  it  has  held  that  position  ever 
since.  Such  a  radical  change  must  mark  an  epoch- 
making  event  in  the  history  of  the  Dominion,  and  this 
was  no  less  an  event  than  the  opening  up  of  the  great 
Northwest  and  the  entering  of  Canada  into  the  arena 
of  the  world's  wheat  growers. 

Previous  to  1906  the  circulation  returns  in  the  gov- 
ernment statement  formed  a  very  reliable  barometer  of 
the  outstanding  circulation  in  the  hands  of  the  public, 
but  in  1907  the  banks  began  to  realize  that  the  moving 


NOTE  ISSUES  AND  THE  BRANCH  SYSTEM      57 

'»f  the  crops  and  the  opening  np  of  the  Northwest  was 
coinniencing  to  test  the  efficiency  and  volume  of  the 
avuiltthle  circulation.    A  nunil)er  of  the  banks  increased 
their  capital.    For  the  recpiirements  of  the  average  cir- 
culation this  would  have  amply  sufficed,  hut  it  was  im- 
possible to  increase  capital  at  a  sufficiently  rapid  rate  to 
reach  the  "soaring  peak"  of  the  October  and  November 
demand  for  currency.     In  1908  an  amendment  to  the 
IJank  Act  was  passed  i>ermitting  banks  to  issue  emer- 
gency currency  diu-ing  the  crop-moving  months,  based 
on  d  percentage  of  their  combined  capital  and  reserve. 
This,  though  useful,  proved  of  only  temporary  and  lim- 
ited advantage.     Another  expedient  was  tried  by  the 
jrovernment  in  permitting  banks  to  deposit  gold  with 
the  Receiver  General  and  obtain  Dominion  notes  in  ex- 
change.   This  was  not  taken  advantage  of  to  any  great 
extent,  as  it  was  found  to  be  not  oidy  slow  and  chunsy 
in  operation,  but  lacked  the  essential  feature  of  elas- 
ticity.   As  might  be  surmised,  during  the  past  few  years 
tlie  banks  have  frecjuently  found  themselves  uncomfor- 
tably near  the  limit  of  their  circulation,  and  at  these 
times  they  do  not  present  the  notes  of  other  banks  for 
redenjption  in  the  usual  way,  but  retain  them  for  their 
own  use  over  the  counter.    For  instance,  in  June,  1912, 
the  hanks  evidently  held  each  other's  notes  until  the  June 
demand  was  satisfied,  and  in  consequence  the  July  re- 
demption was  abnormally  large.     In  studying  the  cir- 
( idatior  returns  for  the  years  1908  to  1912  these  pecu- 
liar conditions,  and  these  expedients  for  supplying  the 
extra  circulation  required,  must  be  taken  into  account, 
(n.  Monthhj  chatigeft. — Figure  3  shows  the  difference 
month  by  month,  six  months  of  redemption  and  six 
months  of  issue.    The  months  arrange  themselves  natu- 
ra!l\  into  three  groups,  as  follows: 


58 


BANKING    PRINCIPLES 


Months  of  Issue 
February. 
March. 


Months  of  Redemption 

April. 

Mav. 


June. 


July. 


August. 

September. 

October. 

November   (3  weeks), 


November  (4th  week). 

December. 

January. 


The  circulation  year  commences  with  the  month  of 
February,   which   Lhows   a   slight   output   varying    m 
amount,* and  due  principally  to  the  recpiirements  of  the 
hunbering  industry.    March  again  calls  for  an  mcreased 
issue,  as  in  this  month  the  lumbering  camps  are  paid  off, 
and  only  sufficient  men  for  the  drives  are  retauied.     In 
April  and  .May  most  of  the  March  circulation  is  re- 
deemed, as  the*  lumbermen  return  from  the  wcmkIs  and 
pay  their  family  bills  for  the  winter  at  the  village  stores, 
or 'otherwise  spend  their  winter's  pay.    June,  especially 
during  the  last  three  or  four  years,  has  shown  a  very  con- 
siderable rise  in  circulation;  then  navigation  opens,  the 
large  lund)er  drives  are  completed  and  the  men  paid  off. 
Payments  for  dairy  products  increase  in  amount  and 
general  activity  prevails  throughout  the  countr>\    July 
is  a  redemption  m«)nth,  and  generally  shows  a  consider- 
able falling  off;  factories  are  closed  down  for  repairs 
and  stock  taking,  and  t'.ie  steady  circulation  of  factory 
])ay-day  asserts  itself  by  its  absence.     In  addition  to 
this  the  summer  exodus  to  the  seaside  and  to  Europe 
conunences  with  the  conse(iuent  purchase  of  traveling 
funds.    August  is  the  first  of  the  three  great  months  of 
issi'-      Butter,  cheese,  and  hay,  with  vegetables  and  all 
manner  of  fruit  for  cannery  and  table  use,  call  largely 


NOTE  ISSUES  AND  THE  BRANCH  SYSTEM 


59 


for  currency,  unci  with  i.u-rcased  momentum  J"'"f«^;f 
with  the  cereals  in  Septemln-r  and  October  unt.  the 
hiifhest  point  of  the  circulation  is  reached,  usuaUy  in 
the  third  week  of  xXovember.  Toward  the  end  ot  No- 
vember the  steady  return  of  the  circulation  conmiences 
a„.l  continues  all  through  December  and  January. 

It  is  of  course,  impossible  to  detail  all  tlie  influences 
which  att'ect  circulation,  but  the  above  covers  the  more 
important  points. 

A  late  winter  or  spring,  for  instance,  wdl,  of  course 
urtect  the  figures  for  the  spring  months  slightly,  and 
th..se  for  the  fall  may  be  influencetl  by  the  lateness  ot 
the  crops  or  by  the  holding  of  their  produce  by  the  iurm- 
trs  in  the  hope  of  better  prices,  but  these  changes  are 
all  adjusted  within  six  months,  the  year's  average  is  not 
affected,  and  the  fluctuations,  though  delayed,  take  place 

as  usual.  .  .      u  •  i 

C2.  Emergency  currency.— The  provision  for  a  special 

issue  during  the  crop-moving  peri(Kl,  though  limited  in 

,peration,  was  found  sufficiently  useful  to  be  incorpo- 


() 


rated  in  the  Act  of  1913.     It  provides  that  during  the 
crop-moving  period,  from  the  first  of  Septeml)er  to  the 
end  of  February,  banks  are  at  liberty  to  increase  their 
note  circulation  to  the  extent  of  15  per  cent  of  the  com- 
bined total  rf  their  paid-up  capital  and  resenes.     A 
bank,  for  instance,  with  a  paid-up  capital  of  !i^lO,000,- 
()(){)  and  a  ics,>rve  of  $5,000,000  would,  of  course,  at  all 
times  be  able  to  issue  notes  up  to  $10,000,000,  but  dur- 
ing  the   i)eriod    from    September    1    to   February   28 
it  can  make  a  further  issue  of  15  per  crnt  of  $15,000,- 
000,  namely,  $2,250,000  excess,  or  a  total  of  »(Sl2,250,- 
000     As  this  excess  issue  is  subject  to  a  government  tax 
..f  5  per  cent,  its  use  entails  a  loss  to  the  bank,  and  it  is 
cc.use(|uently  only  usetl  when  absolutely  necessary. 


60 


BANKING    PRINCIPLES 


ir 


Tile  extent  to  which  hunks  employ  emergency  cur- 
rency is  rather  difficult  to  determine,  as  tlie  monthly  re- 
turn to  the  government  does  not  give  the  necessary  data. 
The  special  statement  of  the  amount  of  circulation  out- 
standing on  each  day  of  the  month  sent  hy  the  banks  to 
the  government  is  not  published ;  it  is  only  used  as  the 
basis  for  figuring  the  interest  on  the  excess  issue.    More- 
over, it  must  be  remembered  that  it  is  necessary  to  con- 
sider each  individual  bank  by  itself  to  obtain  exact  fig- 
ures; when  the  banks  are  considered  as  a  whole,  much 
of  the  excess  issue  of  the  banks,  availing  themselves  of 
this  privilege,  is  offset  by  the  margin  of  circulation  still 
available  to  those  banks  which  are  below  the  limit  of 
their  paid-up  capital.     A  reference  to  the  statement 
given  on  page  54  will  show  that  in  1911  the  maximum 
circulation  was  reached  some  time  in  November,  and 
exceeded  the  total  paid-up  capital  of  the  banks  by  $4,- 
000,000.    In  1012,  the  maximum  circulation  was  reached 
in   December,   and   exceeded    the    paid-up   capital   by 
$5,000,000.     A  reference  to  the  maximum  circulation 
column  in  the  government  statement  of  Octol)er,  1912, 
shows  that  some  time  during  that  month  fifteen  of  the 
twenty-seven  banks  exceeded  their  limit  by  a  total  of 
$3,448,000,  though  the  maximum  figure  of  each  bank 
was  probably  reached  on  different  dates.     At  the  end 
of  October  the  total  circulati«)n  was  apparently  more 
than  $4,000,000  below  the  total  paid-up  capital*  of  the 
banks,  yet  ten  banks  were  using  emergency  currency  to 
the  extent  of  $1,870,000.     Similarly  in  the  Xovemljer 
statement  of  1912  twenty  banks  exceeded  their  limit  by 
a  total  of  nearly  $9,000,000,  while  the  circulation  of  the 
remaining  six  banks,  exclusive  of  the  Sovereign,'  came 

'TV  SoveiviKn  Bank  still  appears  in  the  government  statement  willi  a  ,u.!,t 

fl.? .1^  .  •     "'"""".  f.  '■"'"'"'  "^••"'"'•l''  fof  <ir.ulHtion.     As  u  matter  of 

fuet  this  uniuiint  is  not  avai'ahle  fur  cirtuiation.  mauer  of 


NOTE  ISSUKS  AND  THE  BRANCH  SYSTEM     61 

to  within  $790,000  of  their  capital.  At  the  end  of  No- 
vember, 1012,  fifteen  banks  showed  an  excess  of  $6,744  - 
000,  although  the  difference  between  the  circulation  of 
all  the  banks  and  their  paid-up  capital  was  only  sliirhtlv 
over  $1,000,000.  j      e>     j 

«3.  <^V«/ra/^oWr^*m'^«._For  some  time  it  had  been 
Kit  that  the  emergency  currency  and  other  expedients 
were  only  tentative  measures,  and  that  in  the  revision  of 
the  Bank  Act  a  satisfactory  solution  of  the  difficulty 
would  be  found.  In  this  expectation  the  banks  have  not 
been  disappointed.  The  central  gold  reserve  furnishes  a 
solution  of  the  difficulty,  and  is  a  consistent  amplifica- 
tion of  the  note-issue  system,  which  has  so  completely 
met  the  requirements  of  the  country  during  the  last  fifty 
years.  ^ 

The  central  gold  reserve  is  an  ingenious  plan,  whereby 
the  banks  are  enabled  to  issue  bills  to  an  unlimited 
amount  without  departing   from   the   well-established 
principles  of  an  asset  currency  limited  to  the  amount  of 
paid-up  capital.    The  notes  issued  under  this  plan  pos- 
sess all  the  desirable  features  of  elasticity  and  con- 
vertibility in  common  with  the  ordinary  issue.     As  a 
matter  of  fact,  there  is  only  (me  issue,  and  the  cen- 
tral gold  reserA-es  come  automatically  into  operation 
as  s(K)n  as  the  circulation  issued  by  a  bank  exceeds 
Its  authorized  amount,  and  are  immediately  released  by 
the  retirement  of  the  excess  in  the  ordinary  course  of 
redemption. 

The  machinery  is  simple.  Under  the  new  law  four 
trustees  are  appointed— three  by  the  banks  and  one  bv 
the  Minister  of  Finance— and  the  banks  are  empowered 
t(|  deposit  with  these  trustees  as  much  of  their  gold  as  they 
hke.  This  deposit  is  called  the  central  gold  reserves. 
Ihe  banks  are  then  permitted  to  issue  against  the  re- 


62 


BANKIN(}    PHIXCIPLES 


I! 


serves  their  notes,  dollar  for  dollar,  as  and  when  re- 
quired. 

Thus,  as  has  alrea<ly  heen  said,  a  hank  with  $10,000,- 
000  paid-up  capital,  .$5,000,000  reserve,  and  $15,000,- 
000  of  gold  and  Dominion  notes  (which  are  really  re- 
ceii)ts  for  gold),  would  at  all  times  Iw  able  to  issue  up 
to  $10,000,000,  and  during  the  emergency  period  (Sep- 
tember 1  to  February  28)  would  be  enabled  to  in- 
crease its  circulation  to  $12,250,000.  This  bank  would 
in  all  probability  deposit  with  the  central  gold  reserves, 
say,  $5,000,000  in  gold  or  Dominion  notes.  It  would 
then  be  at  lil)erty  to  allow  its  circulation  to  nm  up  to 
$15,000,000  at  any  time,  or  to  $17,250,000  during  the 
emergency  period,  and  it  could  issue  a  still  larger  amount 
of  notes  by  making  a  further  deposit  with  the  central 
gold  reserves. 

It  is  generally  assumed  that  this  privilege  will  be 
widely  used,  and  that  all  the  banks  will  maintain  a  lib- 
eral deposit  in  the  reserve,  and  keep  an  increased  quan- 
tity of  their  notes  in  the  hands  of  the  branches  avail- 
able for  issue  in  case  they  are  needed. 

It  is  yet  to  be  seen  whether  the  benefits  expected  from 
the  central  gold  reserves  will  be  fully  realized.  The- 
oretically, however,  and  judging  from  past  experience, 
it  is  likely  to  prove  another  excellent  feature  of  the 
Canadian  banking  system.  It  not  only  promises  to  grie 
almast  unlimited  elasticity  to  the  currency,  but  will  aid 
materially  in  the  further  rapid  development  of  the  coun- 
try. 

Under  the  previous  acts,  the  notes  have  proved  them- 
selves to  be  as  good  as  gold;  and  the  excess  circulation 
protected  by  the  central  gold  reserves  will  be  equally 
as  good,  irrespective  of  amount.  The  system  of  issue 
and  redemption  through  the  branches  could  not  be  im- 


NOTK  ISSUES  AND  THK  nilAXCII  SVSTKM 


03 


provc<l  uiMMi.  A  note  issue  which  has  absolute  security, 
rapid  convertibility,  and  unlimited  elasticity  must  surely 
vnmc  as  near  perfection  as  it  is  possible  to  reach. 

Canada's  experience  with  its  gold  reserve  will  be 
watched  with  a  great  deal  of  interest,  not  only  by  the 
banks  and  commercial  interests  of  Canada,  but  also  by 
financiers  and  students  of  banking  the  world  over. 

64.  Lo8t  and  destroyed  notes.— There  is  a  very  ex- 
a^rgerated  idea  in  the  mind  of  the  public  as  to  the 
amount  of  notes  that  are  lost  or  destroyed,  and  never 
presented  to  the  banks  for  redemption.  * 

So  far  as  the  banks  themselves  are  concerned,  the 
amount  is  immaterial;  they  cannot  profit  by  it  in  any 
H  ay,  except  in  so  far  as  the  notes  form  i)art  of  their  gen- 
eral outstanding  circulation.  In  case  of  the  failure  of 
a  bank,  the  liquidator,  at  the  end  of  three  years,  pays 
to  the  government  an  amount  sufficient  to  redeem  all 
outstanding  notes;  in  this  way  the  government  even- 
tually gets  the  benefit  of  any  notes  not  presented  for 
redemption. 

Very  few  people  can  give  instances  within  their  per- 
sonal knowledge  of  notes  destroyed  beyond  recovery 
either  by  fire  or  other  agencies.  When  such  accidents 
do  occur  the  banks  always  stand  prepared  to  consider 
a  refund  of  the  amount  lost,  provided  satisfactory  affi- 
davits and  bonds  are  submitted. 

No  bank  is  able  to  give  any  figures  as  to  the  amount 
of  destroyed  notes  represented  in  its  circulation;  notes 
.ssued  forty  or  fifty  years  ago  are  still  being  presented 
f<»r  f)ayment. 

A  study  of  the  course  of  redemption  of  the  Sovereign 
Bank  circulation  is  interesting.  This  bank  failed  at 
Hie  beginning  of  1908.  The  circulation  was  redeemed 
as  follows: 


64  BANKINC;    rRINCIIM.HS 

Amount        Hrilrfuicd     Monlhl/f 
Date  (hit-  During         Airrayr 

Manding  Year        Redeemed 

Deremher.  1907 $1,088,585 

June,            1908 <(M),4« 

Detfinlwr,  1008 104,045 

June.            1000 74,145 

l>e<-eml>er.  1000 58,540       $45,483          $3,700 

Ju'U',            1010 48,010 

l)eeem»)or,  1010 4<,i;J5          16,405            1,367 

June.            1011 37.815 

Dec-emlKT.  1011 34,170           7,065               664 

June.            low 30.1JM) 

DjH-einlKT,  1014 47,865            6,305               545 

April.           1013 46,005                                   545 

May.            1013 4(».685                                   310 

June.            1013 46.345                                   340 

Deeember,  1013 43,540           4,345               471 

After  six  years,  there  remained  $23,520  inirefleemed, 
or  only  1.18  ])er  cent  of  the  amount  outstanding  on 
January  1,  1908.  As  the  notes,  however,  continue  to 
he  presented  for  redemption  at  the  rate  of  over  three 
hundred  dollars  monthly,  there  is  likely  to  he  a  consider- 
able reduction  made  in  this  amount  during  the  next  few 
years.  It  is  quite  possible  that  fifty  years  hence  Sov- 
ereign Bank  bills  will  still  be  occasionally  presented. 

According  to  the  report  of  the  Comptroller  of  the 
Currency  at  Washington  for  1912,  some  of  the  failed 
national  banks  show  very  low  jiercentages  of  outstand- 
ing notes  to  original  circulation,  for  instance,  15/100 
j)er  cent,  17/100  per  cent,  and  22/100  per  cent.  The 
fractional  currency  of  the  United  States,  issued  prior  to 
the  Civil  War,  is  still  being  presented  for  redemption  in 
surprisingly  large  amounts.  From  the  above  it  is  evi- 
dent that  the  actual  nimiber  of  notes  which  will  never 
be  presented  for  redemption  becomes  almost  negligible 
in  the  course  of  time. 

65.  Branch  system. — Practically  everj'^  country  in  the 
world  except  the  United  States  has  recognized  the  utiUty, 


No'l'i;  i.ssri;s  and  rm:  huantii  sysjkm     Ho 

if  not  the  ul).s«»]iitc  mrtssily.  of  the  hranch  system  of 
Imrikin^  in  Imiulliii^  eoninio«lities  as  li(|iii(I  as  money  or 
iitdit.  A  hank  system  without  hranehes  is  on  a  par  with 
a  city  without  waterworks  or  a  country  without  a  rail- 
lojul  so  far  as  an  e<iuahle  distrihution  of  credit  is  con- 
tvrned. 

In  July,   1913.  there  were  in  Canada  twenty-five 
hanks.    Some  of  them  have  over  three  lunidred  hranehes 
scattered  tlirou^liout  the  Dominion,  receiving  money  in 
\'ancouver  today  and  lending  it  in  Hahfax  tomorrow,  or 
the  reverse;  and  ceaselessly  working  to  remove  money 
t'mni  where  it  is  least  needed  to  u  here  it  is  most  needed. 
With  a  hranch  system  money  always  finds  its  own  level. 
A  merchant  in  the  West  pays  no  more  for  his  hanking 
accommodation  than  his  confrere  of  e(iual  standing  in 
tlie  East.    The  immense  territory  covered  hy  Canada 
alone  makes  hranch  hanking  a.,  ahsolute  necessity  for  the 
economic  and  efficient  distrihution  of  loanable  capital 
and  hanking  facilities.     Any  other  method  would  be 
cuinlwrsome  and  wasteful. 

Tnder  the  «ank  Act  banks  are  permitted  to  "open 
branches,  agencies,  and  ofl^ces."  No  restriction  is  placed 
by  the  government  on  the  number  or  situation  of  the 
branches  to  be  opened  by  any  bank,  and  to  this  absence 
of  red  tape  may  he  ascril)ed  in  great  measure  the  suc- 
cessful working  of  the  system  in  Canada. 

As  a  practical  illustration  of  the  work  accomplished 
by  the  branches  in  distributing  wealth,  let  us  take  two 
towns— It  IS  immaterial  whether  thev  arc  ten  miles  or 
tiiree  thousand  miles  apart.  A  is  a  comparatively  wealthy 
town,  with  a  population  composed  in  great  part  of  re- 
tired merchants  and  farmers,  with  practically  no  in- 
dnstnes  and  with  little  or  no  enterprise.  Its' deposits 
are  large  with  no  demand  or  outlet  for  money  in  the 


MICROCOPY   RESOIUTION   TEST   CHART 

(ANSI  and  ISO  TEST  CHART  N<     2) 


1.0 


2.8 


2.5 
22 

2£ 
1.8 


^  /APPLIED  liVMGE     Inc 

1^-  1653   Easl   Mam   Street 

Ks  Rochester.   Ne»   ''ork        14609       USA 

^=  (716)   482  -  0300  -  ?''one 

^B  (716)   288  -  5989  -  Fa» 


66 


HANKING    PRINCIPLKS 


r: 


I 


! 


»iS  town  with  all  ,ls  money  invcstal  in  its  constantly 
."creas,ng  „„|„sfies.  and  the  hnnu-l.  here  ,4"t  bnt 
measre  .leposits  to  meet  the  heavy  demands    or  a 
>a-K«.     -Now  this  is  where  ,he  hraneh  svsten,  steps     , 
a  "I  enables  the  H  brand,  to  nse  the  sni-plns  funds 
^.  thus  snpply.ng  the  lejritin.ate  re,,nirements  of  B' 

the  town,     n  hen  ,t  ,s  ren.enibere.1  that  this  prineinle 
,    work,„g  every  day  in  hundre.Is  of  branches  fh  oZ. 
out  Canada  ,n  towns  and  villages  ten,  one  hundred   or 
one  thousand  n.iles  apart,  and  yet  just  as  intinmteKi," 
erdependent  of  eaeh  other  as  in  the  above  instan«,'  the 

Frt 't^:'  H";;",'^' '"'  '"ir"'  '•"'™'  -» "^  ^■ 

I'rom  this  ,t  «,ll  be  seen  that  no  matter  how  small  the 

"iilj  by  the  a^adable  resources  of  the  bank  of  which  it 
io  ms  an  n.tesral  part.    A  branch  till  is  like  the  «id 
«w  s  cruse  of  oil ;  it  can  never  be  en.ptied  nor  ve    on  the 
other  hand,  can  it  be  made  to  overflow 

branches  of  Canada  are  spread  and  the  variety  of  in- 
tfV:  ;,'"^'',"»>-  '"i-'-^ter,  impresses  one  with    he 
Ik  f /•""'""''"  ^""'^'^  "<=  ""'  l"eal  in  character 

tt  Dor-ori^let;'-^- ""'  '""•" "'  p™™- "  -"  "y 

teran^tre^r^r'r^'f '■-^'^''™''' '^- 

;W,iehhaveenab,edrb:Lt:rstrrrir-: 

rrc:erriSe;:„rtt^t'''^^^^^^^ 

Hcuja  lack  m  a  ^reat  measure  the  elasticity 


.NOTi:  ISSIKS  AND  THK  BHANCtll  SYSlk.M      67 

"(  ivstie  ami  mien.ption  wl.ich  is  its  most  useful  and 
.•h-.ctenst,c  feature.     Without  the  ciroulatio,,    ,„"' 
cj,.c.  ,t  would    V  impossible  for  the  banks   to  op«, 
Inanches  „,  ,.„•  and  sparsely  populated  districts    "^ 

loss  fo>    the  hrst  three  or  four  years,  and  hearimr 
i-  .n  „„„d  a  consideration  of  th;  large  numtr  "^ 
''ranches  opened  yearly  by  the  banks,  must  lea^to  the 
>Mcl„s,on  that  n,any  banks  are  devoting  at  C  Z 
'l">le  of  then-  profits  on  circulation  to  the  opening  of 
l"a..cl,es  an,    the  ,levelop„,ent  of  new  distr  ets  ^A„ 
average  o    three  or  four  new  branches  open  d  yeariy 
»..Sl.t  easdy  absorb  the  profit  on  ,$I,ooo,ooS  circu  a«™ 
especally  „,  the  ^\-est,  where  the  initial  and  tteoi^at ' 
ing  expenses  are  high.  operat- 

During  the  year  ended  July  31,  1918,  21,  branches 
«ere  opened,  distributed  as  follows:  ""-an^es 

Pwrim-n  Branches  in    Branches  in  Increase, 

frmmce  Existence         Existence  '""^""'w 

(J,.,.|«^..,      '-JJ?  U13  4S 

N'ivaSTOlia.    ,..,.:  J,,'  ??|  82 

Nfw  liriiiiswick.  74  'I™  3  decrease 

['riiici-Kdivard  Island.  14  \\ 

S:;''" ■»?      ^      V""^ 

S'-' '-'■^"-        'f       ^*      g 

''otal  in  Canada..    2,718     ~7^     

\'«f„„nclland..  .         ,o       ^'^f^      '^05 

^        66       4 

2.793      3,004      211 

^Vith  the  exception  of  Scotland,  where  branch  bank- 
'n^  has  been  brou^.ht  to  a  fine  de^^ree  of  p^ffeS. 


'H 


H    ■/■ 


M 


r^t 


OS  HANKINCi    ruiN(  iri.KS 

Canada  sliows  a  larger  number  of  brandies  in  propor- 
tion to  popuhition  tban  any  otlier  country  in  the  world, 
as  the  following  figures  will  show: 

.1/  Kitd  of  i'.hj 

Scotland  i»«»'  '>'»»»^  t*'  ^'^'^'»>'  '^'^**^'  people 

(^anada  «>»""  bank  to  overy  'i,Si't  jwop  e 

United  Kingdom one  bank  to  every  5,110  peop  e 

Fnuland  «»t'  bank  to  every  5,4.^2-i  people 

United  States one  bank  to  ever>'  :J,407  people 

As  regards  cities,  Bristol,  England,  for  example,  has 
one  bank  for  every  5,674  people,  while  Toronto,  a  city  of 
similar  size,  has  one  bank  for  every  2.354  people.    Cin- 
cinnati in  the  Ignited  States  has  one  bank  to  every  9,120 
people.     Taking  Canadian  cities  as  a  whole  there  is 
one  bank  to  every  3,100  people,  while  the  United  States 
can  only  show  one  bank  for  9,700.    It  will  be  seen  from 
this  that  Canadian  banks  have  given  a  good  account  of 
their  stewardship  so  far  as  supplying  banking  facilities 
to  the  country  is  concerned.     Without  asset  currency, 
however,  such  expansion  would  have  been  impossible. 
r>7.  Branch  Hifsiem  and  the  homncer. — The  econom- 
ical and  equable  distribution  of  loanable  funds  made 
possible  by  the  branch  system  has  already  been  referred 
to.    The  control  of  these  funds  and  the  ability  to  direct 
them  to  diflferent  parts  of  the  country  according  to  the 
demands  of  trade  and  agriculture  have  enabled  the  banks 
to  accomplish  astonishing  results  with  the  means  at  their 
disposal.     The  banks  as  a  whole  form  a  vast  clearing 
house  not  only  between  the  depositor  and  the  borrower, 
but  also  between  borrower  and  borrower.    A  little  con- 
sideration shows  that  the  latter  is  an  important  factor  in 
the  financial  life  of  a  country  so  extensive  as  Canada. 
The  banks  are  continually  lending  to  Peter  to  pay  Paul, 
although  these  two  gentlemen  may  be  quite  unconscious 


NOTE  ISST'ES  AM)  THE  HUANCH  SYSTEM      G!) 


of  the  relation  and  have  probably  never  even  heartl  of 
each  other. 

There  is  practically  little  or  no  fluctuation  in  the  total 
amount  of  commercial  loans,  only  a  steady  increase  due 
to  the  growth  of  the  country,  the  demand  for  the  loan- 
able capital  at  the  disposal  of  the  banks  generally  being 
ill  excess  of  the  supply.  In  the  government  statement 
of  July,  1913,  commercial  loans  were  re})orted  at  a 
trifle  under  $902,000,000,  as  against  $899,000,000  in  the 
preceding  month  and  $852,000,000  in  July,  1912,  yet 
in  the  face  of  this  constant  increase,  banks  are  accused 
of  restricting  their  loans  unduly.  It  is  true  they  re- 
strict unwise  expansion  in  times  of  financial  stress,  and 
are  always  foresighted  in  preparing  the  country  for 
troublesome  times,  but  this  action  is  of  inestimable  bene- 
fit to  the  country.  Even  under  the  serious  conditions 
which  prevailed  in  1893,  1907,  and  1913,  regulai-  custom- 
ers were  not  restricted  in  the  use  of  their  authorized 
lines  of  credit  or  reasonable  renewals  thereof.  The  banks 
(lid  refuse  to  make  advances  for  projects  outside  ordinary 
business  requirements,  such,  for  instance,  as  an  unusually 
iieavy  purchase  of  raw  material,  not  for  the  immediate 
needs  of  the  business,  but  simply  available  at  a  bargain. 
Xew  accounts  at  such  a  time  are  not  encouraged,  and 
all  ventures  other  than  those  devoted  to  the  creation  and 
distribution  of  products  are  consistently  refused  assist- 
ance. 

A  study  of  the  bank  returns  for  the  period  referred 
to  will  show  how  the  banks  use  every  means  to  meet  the 
needs  of  their  regular  customers.  In  1893,  for  instance, 
current  loans  increased  by  over  $11,000,000  between  Jan- 
uary and  June  with  an  increase  of  barely  $1,000,000 
in  deposits.  The  banks  felt  that  they  were  under  a 
moral  obligation  to  take  care  of  their  customers  to  the 


(0 


HANKlNd    rUINClI'I.KS 


ii| 


1 
I 


extent  of  their  current  lines  of  credit,  and  provided  these 
funds  by  reducing  their  foreign  balances  just  at  the  time 
when  they  could  have  been  used  at  a  profit,  yet  the  Ca- 
nadian customers  were  asked  to  pay  no  more  than  the 
usual  rate  of  (J  or  7  per  cent.' 

The  slow  and  apparently  placid  increase  of  the  loans, 
as  shown  by  the  monthly  statements,  is  deceptive,  for 
beneath  the  surface  lies  a  seething  mass  of  activity,  in- 
extricably interwoven.  The  continued  existence  of  each 
kind  of  advance  depends  in  great  measure  on  the  con- 
stant mobility  of  every  other.  Repayments  of  advances 
made  by  one  class  of  industry  are  received  in  time  to  be 
loaned  to  an  entirely  different  business,  possibly  at  the 
other  end  of  the  country,  and  so  on.  If  lumber  becomes 
unsalable  from  overproduction  or  other  causes,  the  ad- 
vances made  for  lumbering  operations  would  not  be  liqui- 
dated in  season,  and  the  banks  might  find  it  difficult  to 
satisfy  the  requirements  of  other  industries,  which  gen- 
erally make  use  of  these  funds  as  they  are  returned. 

This  will  indicate  how  necessary  it  is  for  the  banks  to 
observe  at  all  times  one  of  the  most  important  rules  of 
sound  banking,  namely,  that  every  loan  made  by  a  bank 
should  rest  on  a  foundation  of  salable  merchandise  or 
collectible  debts.  It  is  for  this  reason  that  loans  on  real 
estate  have  no  place  on  the  books  of  a  commercial  bank, 
whose  profit  and  existence  are  depernlent  on  the  fre- 
quency of  this  "turn  over,"  and  the  keen  interest  which 
bankers  take  in  preventing  overjn'oduction  in  any  line 
is  thus  justified.  The  average  customer  gauges  his  out- 
put from  local  or  provincial  ex])erience.  the  banker  from 
a  national  and  international  standj)oiiit. 

A  concrete  example  may  be  of  value  in  illustrating 
the  circulation  of  credit  attained  through  the  branch  sys- 

'  Sec  call  loans  in  New  York,  jkikp  91. 


NOTE  ISSrKS  AND  TIIK  nUANCH  SYSTEM      71 

km.    Take,  for  inslaiicr,  a  wtstcni  farmer  who  borrows 
money  from  a  hank  in  the  hegimiing  of  the  year  in  order 
to  pay  for  seed  and  Uihor,  and  ahout  tiie  same  time  be- 
comes indebted  to  the  local  store  for  supplies  and  the  like. 
When  he  harvests  his  crop,  in  the  ordinary  eourse,  he  sells 
it  to  a  grain  buyer,  who  pays  him  by  a  cheuk  or  order  on 
the  bank.    This  money  is  used  by  the  farmer  to  discharge 
his  debt  to  the  bank  and  to  the  store;  the  balance,  if  he 
is  a  thrifty  man,  he  deposits.    The  storekeeper  remits  his 
receipts  from  such  payments  to  the  wholesale  houses 
in  the  East,  and  the  wholesaler  licpiidates  his  indebted- 
ness to  his  bank  or  to  the  manufacturer,  and  the  latter 
in  turn  pays  his  bank  and  buys  more  raw  material.    This 
is  an  instance  of  oidy  one  class  of  loan,  but  it  will  give 
some  idea  of  the  fluidity  and  interchangeability  of  credit 
which  is  possible  through  the  branch  system.    It  might 
further  be  pointed  out  that  the  aggregate  liquidation  of 
loans  by  the  farmers  and  correlative  debtors  enables 
the  banks  to  finance  the  crops  by  making  advances 
against  warehouse  receipts,  etc.,  which  are  ultimately 
liquidated  by  drafts  with  bills  of  lading  attached.    This 
financial  operation  provides  the  basis  for  foreign  ex- 
change with  which  to  j^ay  for  the  raw  material  and  other 
imports  of  the  manufacturer  and  wholesaler.    It  is  im- 
possible fully  to  appreciate  the  far-reaching  effect  of 
even  this  simple  payment  of  a  farmer's  debt.    The  dis- 
charge in  any  part  of  Canada  of  a  debt  of  no  matter 
what  nature  or  size,  is  likely  to  be  equally  dynamic  in 
its  influence  on  the  huge  though  sensitive  volume  of 

loans. 

(58.  Estahlisltin^  a  line  of  credit.— There  are  certain 
conditions  covering  the  relation  of  Canadian  banks  with 
their  borrowers  which  are  invariably  observed.  One  is. 
that  no  man  can  be  a  ])orrower  from  more  than  one 


:| 


I 


72  HANKINC;    l'UIN(  IPLKS 

bank,  and  it  is  only  in  llic  case  oi'  a  very  large  account 
lliat  this  nilf  is  hroUcn,  and  tlicn  only  by  mutual  agree- 
ment between  the  banks  interested.  The  advantage  of 
this  "one  bank"  policy  is  obvious.  The  customer  benefits 
from  the  fact  that  in  being  loyal  to  one  bank  he  can  rely 
upon  the  supi)(>rt  of  that  bank  at  all  times.  The  bank 
is  also  thoroughly  in  touch  with  his  position  and  pros- 
pects, and  is  often  able  to  give  valuable  advice.  An- 
other condition  a  Canadian  bank  insists  on  is,  that  a 
full  statement  of  a  customer's  affairs  should  be  submitted 
to  it  each  year,  and  that  as  far  as  possible  loans  should 
be  cleaned  up  at  least  once  a  year. 

On  the  fulfilment  of  these  conditions  the  bank  on  its 
part  grants  a  customer  what  is  called  a  line  of  credit, 
based  on  his  estimated  reciuirements,  which  is  generally 
for  a  period  of  one  year,  during  which  time  the  customer 
is  able  to  use  as  nuich  or  as  little  of  the  authorized  credit 
as  his  business  requires ;  providing,  however,  that  he  does 
not  exceed  the  limit.  A  customer  of  a  Canadian  bank  of 
good  standing  has  therefore  very  little  to  worry  about 
during  the  currency  of  his  line  of  credit.  He  is  not 
called  upon  to  pay  interest  on  more  money  than  he  is 
actually  using,  and  he  is,  moreover,  assured  of  the  sup- 
port of  the  bank  in  the  oj)eration  of  his  legitimate  busi- 
ness, no  matter  what  the  financial  conditions  may  be. 

The  position  of  a  bank  customer  in  the  United  States 
is  very  different  and  not  always  so  comfortable.  Na- 
tional banks  are  restricted  bv  law  in  the  amount  of 
loans  they  may  make  to  any  one  firm  or  corporation,  and 
large  concerns  are  forced  to  seek  loans  all  over  the  coun- 
try. This  practice  is  not  to  the  advantage  of  the  bor- 
rower; he  is  dependent  on  note  brokers  to  dispose  of  his 
paper  to  various  purchasers  throughout  the  United 
States,  to  whom  he  is  personally  unknown.    The  paper 


NUTi:  ISSIKS  AM)  Till-:  BUANCII  SVSTK.M      7:5 

must  l»c  met  al  inaturily  without  fail.  True,  piovisiou 
could  be  made  by  selling  more  paper,  but  il"  money  is  at 
all  scaree  even  this  resource  is  not  available,  and  hi  con- 
sc(iuenee,  solvent  firms  are  often  forced  to  the  wall.  The 
position  is  an  unfortunate  one  for  the  borrower,  not 
oiilv  because  his  linances  are  always  in  a  state  of  uncer- 
tainty,  but  because  the  practice  has  a  tendency  to  en- 
courage over-borrowing  in  times  of  easy  money,  with 
consecpient  over-expansion.  This  evil  is  unlikely  to  hap- 
pen to  a  man  who  has  only  one  bank  to  deal  with,  as 
no  trained  banker  would  allow  a  customer  to  obtain 
more  money  from  the  bank  than  his  business  conditions 
warranted.  -cV  brake  is  just  as  necessary  in  business 
life  for  averting  disaster,  as  it  is  in  the  mechanical 
world. 

This  method  of  financing  naturally  restricts  the  manu- 
facturer and  wholesale  merchant  to  the  making  of  one 
class  of  paper,  their  own  single  name  notes,  and  conse- 
([uently  comparatively  few  settlements  with  their  cus- 
tomers are  effected  by  means  of  notes  or  drafts,  the 
amounts  due  being  carried  in  open  account  until  the 
customer  remits  according  to  the  terms  of  the  sale. 

In  Canada,  however,  open  accounts  are  the  excep- 
tion, and  practically  every  sale  of  goods  is  subject  to 
settlement  by  draft  or  note.  These  notes  and  drafts  are 
known  as  trade  bills  and  are  discounted  freely  by  a  bank 
and  collected  through  its  various  branches,  the  proceeds 
being  applied  in  reduction  of  the  customer's  loans. 

The  Canadian  borrower  has  therefore  two  methods  of 
borrowing,  loans  and  trade  paper.  Loans  are  made 
with  or  without  security  for  the  purpose  of  creating  or 
])urchasing  goods.  The  goods  when  made  or  acquired 
are  exchanged  for  cash,  notes,  or  the  right  to  draw  on 
the  purchaser;   the  two  latter  are  known  as  trade  bills 


74 


HANKlNCi    rui\(  iri.KS 


l! 


If 


and,  whtn  tiiscounttd  by  a  rii>ulahU'  liiiii,  l»)rin  ti»c  lugh- 
cst  class  of  scciirily  a  hank  nm  have. 

The  (liscountin^r  of  trade  paper  is  of  heiicfit  both  to  tlie 
bank  and  to  the  borrowi-r.  The  latter  changes  a  direct 
loan  into  an  indirect  or  contingent  liability,  and  is  as- 
snred  of  the  ett'ective  and  prompt  collection  of  the  debt. 
The  bank  receives  tangible  evidence  that  its  loan  has 
been  devoted  to  the  production  of  goods,  and  that  the 
goods  have  l)een  disposed  of  to  responsible  merchants; 
furthermore,  its  position  is  strengthened  by  a  second 
name  and  a  definite  date  of  payment. 

(59.  Bram-hcH  atid  punics.— It  is  apparent  that  the 
branch  system  not  oidy  gathers  up  money  throughout 
the  country,  but  distributes  and  varies  the  risk  of  the 
bank's  investments.     It  does  more  than  this,  it  distrib- 
utes the  risk  of  the  deposits  which,  at  times,  is  a  very 
real  risk.     A  run  on  a  solvent  bank  is  always  more  or 
less  local  in  character,  and  though  quite  capable  of  wreck- 
ing an  iiniividual  bank  would  not  serious  affect  the  stand- 
ing of  a  branch  banking  system.    Not  only  would  the 
head  office  be  able  to  send  ample  funds  to  pay  off  every 
deposit  if  necessary,  but  the  branch  itself  would  be  in  a 
position  to  allay  tlie  run  by  its  ability  to  pay  out  its  own 
notes;  these  would  be  readily  taken  by  the  depositors 
and,  as  a  rule,  assistance  from  head  office  would  not  be 
required.    Nothing  will  stop  a  run  of  this  kind  quicker 
than  an  apparent  willingness  and  ability  to  meet  all 
demands.    Freciuently,  in  such  cases,  the  majority  of  the 
deposits  are  returned  to  the  bank  if  it  is  willing  to  take 
them.    Depositors  wh(J  can  be  stampeded  in  this  man- 
ner by  a  chance  word  or  rumor  are  not  desirable,  and 
the  refusal  to  reojjcn  a  few  of  these  accoimts  has  a  very 
salutary  effect  on  a  community.     So  unreasonable  arc 
panics  of  this  nature  that  pco])le  have  been  known  to 


NOTE  issrr.s  and  Tin:  miANcii  svstk.m    75 

\\illi<liu\v  money  Iroin  a  siiiall  city  bnimli  and  dcposil 
il  in  till-  main  otlicc  ol"  the  same  hank  I'uither  down  the 
street,  hut  occupying  a  more  pretentious  building.  Such 
panics  as  these  are  <hsagreeahle,  l)ut  (h)  not  seriously 
all'ect  a  hanU  as  a  whole,  and  I'ortunately  they  sehloni 
liappen. 

Even  a  serious  loss  hy  way  of  a  had  loan  would  not 
all'ect  the  security  ol'  a  branch  depositor;  no  matter  how- 
small  the  branch,  the  depositor  shares  in  the  general  se- 
curity of  the  assets  of  the  whole  bank.  The  failure 
of  a  large  customer  might  easily  force  a  purely  local 
hank  to  close  its  doors,  but  under  the  branch  system  the 
loss  would  be  spread  over  the  earnings  of  the  whole 
system. 

Although  the  keenest  competition  exists  among  the 
hanks  in  obtaining  business  at  their  various  branches,  and 
little  or  no  intercourse  occurs  between  the  general  man- 
agers in  ordinary  times,  they  are,  as  trained  bankers, 
naturally  in  accord  in  interpreting  the  first  signs  of 
trouble  on  the  financial  horizon,  and  either  in  their  sev- 
eral annual  addresses  or  through  the  press  warn  the 
public  to  retrench  and  prepare  for  the  storm.  All  the 
annual  reports  of  the  banks  issued  at  the  end  of  1906 
and  begimiing  of  1907  contained,  in  the  addresses  of 
the  several  general  managers,  serious  warnings  of  trou- 
blesome times  ahead,  which  unhappily  materialized  in 
October,  1907.  Banks  made  themselves  very  unpopular 
in  the  early  part  of  1907  by  their  insistence  on  retrench- 
ment in  ail  lines  of  business  activity,  but  their  wisdom 
was  fully  justified  by  the  result— Canada  rode  through 
the  storm  inconvenienced  but  unscathed. 

Should  a  sudden  emergency  ever  arise  a  few  hours 
would  suftice  to  bring  the  general  managers  of  the 
twenty-five  banks  to  Montreal  or  Toronto.    Their  united 


76 


HANKINC;     rUIN(  IPI.KS 


cimmcl  uiul  cxptriciur  wouM  ;;«»  i'uv  lo  wani  olV  Ihc 
anticipated  trouble.  Jii  a  few  lioiirs,  if  neressary,  every 
brancli  in  Cunaaa  from  Dawson  City  to  Halifax  would 
uet  ill  unison.  With  a  system  capable  of  such  control 
u  f^eneral  crisis  or  panic  wcuild  be  almost  impossible. 

Consider,  too,  the  personnel  of  the  ^•eneral  managers, 
who  are  men  trained  from  their  youth  up  in  their  pro- 
fession, as  only  the  l)ranch  system  can  train.     In  their 
early  years,  moving  from  branch  to  branch  throughout 
Canatla,  they  became  thoroughly  versed  in  local  customs 
and  environments,  and  in  many  cases  they  gained  experi- 
ence in  foreign  branches  in  England,  the  United  States, 
and  elsewhere.    As  accountants  and  managers  of  large 
city  branches  they  obtained  a  broad  knowledge  of  na- 
tional trade  and  finance  until,  as  general  managers,  they 
are  found  not  only  directing  the  administration  of  their 
numerous  branches,  but  also  digesting  and  interpreting 
the  reports  of  conditions  received  from  the  branches, 
scattered  throughout  the  length  and  breadth  of  Canada. 
There  are  few  things  connected  with  the  life  of  Canada 
that  a  banker  can  afford  to  leave  unstudied.    The  week- 
ly reports  or  news  letters  received  from  the  branch  man- 
agers deal  with  every  variety  of  subject,  from  the  price 
of  staples  to  the  death  of  a  leading  citizen.    As  a  result, 
the  bankers  know  more  of  the  general  conditions  of 
Canada  as  a  whole  than  anyone  else.    It  has  been  said 
that  the  files  of  one  of  the  larger  banks  contain  more 
valuable  and  accurate  information  than  can  be  found 
in  any  newspaper  office. 

70.  General  revieiv. — x\  study  of  the  Canadian  bank- 
ing system  along  the  above  lines  will  demonstrate  clearly 
why  it  has  been  accorded  such  a  high  place  among  the 
banking  systems  of  the  world,  not  only  on  account  of  the 
equable  distribution  of  loanable  funds  through  the  branch 


Nun:  issiKs  and  jiii:  imANcii  svsTi:.\i    77 


sN  slciii,  but  also  nil  account  of  the  absolute  .safety  of  the 
iKilc  issue  and  its  elasticity  in  meeting  every  need  of 
national  life  and  coinnierce.  The  uniform  reciprocal 
payment  of  each  other's  notes  at  par  by  the  banks  all 
(•\cr  the  Dominion,  followed  by  prompt  redemption, 
renders  forcd  and  unhealthy  inHation  an  impossibiUty, 
while  the  automatic  expansion  of  the  circulation  when- 
ever recjuired  or  called  for  by  the  exi^<encies  of  conmierce 
and  agriculture  renders  it  peculiarly  adapted  to  tlie  needs 
of  a  young  and  growing  country  like  Canada. 

iVn  appreciative  review  of  the  work  accomplished  by 
the  banking  system  of  Canada  is  given  by  W.  R.  Law- 
son,  the  well-known  English  financial  writer  and  critic, 
in  his  "Canada  and  the  Kmpire": 

'i'lic  ('iiiitulitins  Iwivc  faith  in  tlic  system  itself,  nnd  in  the 
nun  who  diri-ct  it. 

So  far  thiir  faith  has  lu-eii  suhstantialK'  justihcd  by  results 
and  hy  aetual  experienee.  These  have  been  so  remarkable  as 
to  attract  attention  and  even  to  excite  envy  in  other  countries. 
While  Canada  was  still  a  poor  country,  her  banking  system 
was  universally  recognized  as  a  valuable  asset.  Sceptical 
critics  suf^gested  that  its  limited  resources  and  the  small  volume 
of  its  business  migl't  be  the  real  causes  of  its  success,  "Wait," 
they  said,  "until  it  can  be  tested  on  a  large  scale,  and  sec  what 
happens  then."  In  the  past  ten  years  it  lias  undergone  that 
larger  test  and  come  through  it  satisfactorily.  When  the 
call  came  for  capital  and  credit  to  finance  the  Westward  rush 
of  settlers  it  was  provided  promptly  and  liberally.  The  only 
danger  was  that  it  might  become  too  generous.  And  as  the 
Ivistward  movement  of  produce  expandetl,  it,  too,  was  financed 
with  seldom  a  hitch. 

The  boom  of  1,905  to  1909  in  the  Northwest  would  soon 
have  found  out  the  weak  joints  in  an  unsound  banking  system. 
If  Saskatchewan  and  Alberta  had  been  suddenly  covered  with 
American  National  Banks  as  thev  were  with  branches  of  old- 


78 


BANKING    rillNClPLES 


established  Canadian  banks,  it  is  awful  to  think  what  t'  .  end 
might  have  been.  But  the  Canadian  banks  were  equal  to  the 
occasion.  They  exhibited  a  reserve  power  and  a  capacity  of 
expansion  which  added  not  a  little  to  their  previous  reputa- 
tion. At  the  outset  they  excited  admiration  by  the  energy 
and  rapidity  with  which  they  responded  to  the  new  demands 
suddenly  sprung  on  them.  At  the  finish  they  were  no  less 
athnirablc  for  the  self-restraint  they  showed  and  the  firmness 
with  which  they  checked  a  great  wa'e  of  speculation  that 
might  soon  have  passed  out  of  control. 

Of  all  the  Canadian  ideals  here  reviewed,  none  has  come  so 
near  realizing  itself  as  the  banking  system.  None  is,  there- 
fore, better  worth  studying  at  the  present  moment.  The  future 
of  the  Dominion  depends  more  on  it  than  on  almost  any  other 
Canadian  institution. 

Canada  has  indeed  been  fortunate  in  her  banking  legislation. 
It  has  been  eminently  practical,  also  eminently  reasonable,  and 
always  adapted  to  the  special  circumstances  of  the  country. 


i 

i 
i 


CIIAPTEH   VI 


ANALYSIS    OF    A    BANK    STATEMENT 


Ip  ?  I 


III 


71.  Bank  statements. — The  Bank  Act  requires  the 
hanks  to  furnish  the  government  with  monthly  state- 
ments of  their  assets  aiul  Hahilities  and,  in  addition  to 
these,  an  amuial  statement  to  the  sharehoklers.  The  lat- 
ter differs  only  slightly  in  detail  from  the  monthly  state- 
ments and  is  snhmitted  to  the  shareholders  at  the  an- 
nual general  meeting  accompanied  by  the  profit  and 
loss  statement  and  the  report  of  the  auditors.  The  an- 
nual reports  of  the  several  banks  appear  at  various  dates 
during  the  year,  i)rincipally  during  the  winter  months. 
The  monthly  and  annual  statements  are  published  in 
the  various  financial  and  other  papers  and  are  subjected 
to  the  closest  scrutiny  and  analysis  both  by  the  press 
and  the  banks  themselves. 

The  totals  of  the  com])ined  monthly  statements  of  the 
banks  as  published  by  the  government  are  of  particular 
interest,  as  the  figures  generally  afford  a  very  fair  barom- 
eter of  the  financial  condition  of  the  country. 

To  the  average  man  a  bank  statement  has  no  more 
than  a  passing  interest.  Even  if  he  goes  so  far  as  to 
compare  the  statement  of  one  bank  with  another,  the 
bare  figures  tell  him  very  little  more  than  that  one  bank 
has  larger  deposits  or  loans  than  the  other,  but  as  to 
the  standing  or  earning  power  of  the  banks  in  question, 
he  can  form  but  a  faint  idea  imtil  he  has  compared 
them  on  a  common  percentage  basis,  say  to  total  assets. 

80 


AX.VLYSIS    or    A    IJANK    STATEMENT 


81 


A  full  understanding  of  a  statement  of  a  bank  forms 
a  very  good  introduction  to  the  actual  practice  of  the 
business;  and  in  order  to  present  the  leading  features 
in  the  most  comprehensive  form  the  statement'  on  page 
79  (Figure  4)  has  been  prepared,  based  on  the  an- 
nual statements  of  several  banks,  with  the  amounts  un- 
der the  various  headings  reduced  to  a  percentage  to 
total  assets.  For  comparison,  a  percentage  to  total 
liabilities  to  the  public  is  also  given.  The  several  head- 
ings will  be  considered  briefly  in  detail,  and  should  be 
studied  with  special  reference  as  to  their  relation  the  one 
with  the  other.  The  percentages  will  be  referred  to  as 
dollars  in  discussing  them. 

A  bank  statement  is  primarily  intended  to  show  the 
distribution  of  the  assets  of  a  bank  and  to  whom  they 
ultimately  belong,  the  public  or  the  shareholders.  The 
bank  occupies  a  dual  relation  to  the  public ;  it  is,  on  the 
one  hand,  a  borrower  of  credit  and,  on  the  other,  a 
lender.  The  prime  qualification  for  successful  banking 
is  so  to  command  the  public  confidence  that  the  public 
will  deposit  its  money  freely  and  continuously.  The  lia- 
bilities of  a  bank  to  the  public  are  therefore  of  the  most 
vital  importance  to  its  existence  and  will  be  considered 
first. 

72.  Deposits  imyahle  after  notice. — A  reference  to 
the  statement  will  show  that  nearly  60  per  cent  of  the 
liabilities  to  the  public  consist  of  interest-bearing  depos- 
its or,  as  they  are  sometimes  called,  time  deposits  or  sa\  - 
ings  bank  deposits.  They  form  the  largest  individual 
item  in  the  statement  with  the  exception  of  current  loans. 
Time  deposits  are  so  called  because  they  are  deposits 
made  in  the  savings  bank  department  of  a  bank  and 

'  This  statement  should  also  he  compared  with  the  percentage  of  the  combined 
nionthlv  statements  of  all  the  Canadian  banks  as  reported  to  the  government  for 
the  month  of  July,  1913,  Figure  i. 
C— VIII— 6 


82 


BANKINd    PRINCIPLES 


ill    [■ 


1. 

4' 


under  tlie  rules  of  tlie  department  are  subjeet  to  a  with- 
drawal notice  of  ten  or  fifteen  days.  Practically,  they 
are  payable  on  demand,  as  no  bank  now  makes  a  prac- 
tice of  exacting  the  required  notice,  although  the  ma- 
jority still  retain  a  clause  to  that  eflFect  in  their  pass 
books.  All  these  deposits  bear  interest  at  the  rate  of 
3  per  cent  compounded  semi-annually. 

The  cliief  dillieuity  a  l)ank  experiences  in  this  kind 
of  deposit  lies  in  the  fact  that  a  certain  class  of  the  pub- 
lic is  inclined  to  look  upon  a  savings  bank  account  as  a 
convenience  as  well  as  an  investment;  the  two  are  not 
compatible.  ^V  time  deposit  requires  a  small  reserve 
and  a  minimum  of  bookkeeping,  and  a  3  per  cent  rate 
leaves  a  margin  of  profit  to  the  bank,  but  to  give  3  per 
cent  on  an  account  subject  to  frecjuent  checking  is  an- 
other matter  and  would  be  likely  to  result  in  an  expense 
to  the  bank  rather  than  a  i)rofit.  In  fact,  of  late  years 
many  of  the  savings  baidv  deposits,  through  competi- 
tion, have  been  allowed  to  develop  into  ordinary  check- 
ing accounts. 

Theory  as  well  as  experience  in  Canada  has  shown 
that  no  bank  can  afford  to  pay  a  higher  rate  than  3  per 
cent  without  seriously  affecting  its  position.  In  fact 
an  increase  of  even  l  or  1  \)er  cent  would  change  the 
present  net  profits  of  the  majority  of  the  banks  into  a 
loss.^  Deposits  bought  too  dearly  nmst  be  fully  em- 
ployed because  interest  and  dividends  must  be  earned  in 
some  way.  Competition  prevents  a  bank  from  lending 
money  to  legitimate  enterprises  at  a  higher  rate  than 
the  market  rate;  conse(iuently  a  liank  paying  a  high  rate 
for  its  deposits  is  forced  to  invest  its  money  in  risky 
undertakings,  or  else  to  maintain  inadequate  reserves, 
both  very  dangerous  and  undesirable  expedients. 

•See  sections  92  and  22.">. 


ANALYSIS  OF  A  BANK  STATEMENT 


83 


Fortunately,  the  bulk  of  the  savings  bank  depositors 
arc  (juite  content  to  use  their  savings  bank  accounts  for 
the  purpose  intended — a  depositing  place  for  their  sur- 
plus money.  Each  person  who  keeps  a  bank  account 
does  so  for  his  own  convenience,  but  the  result  is  an 
( nornious  control  of  credit  placed  at  the  disposal  of  the 
industries  of  the  country  through  the  agency  of  the 
hanks  and  their  branches,  ^n  fact  without  these  de- 
])()sits  banks  could  render  \at  little  assistance  to  the 
trade  and  commerce  of  the  country.  The  steadiness  of 
tlit'se  deposits,  the  fact  that  by  the  law  of  average  they 
can  be  relied  upon  to  remain  fairly  constant  in  amount 
and  that,  except  in  very  stringent  times,  they  are  con- 
stantly increasing,  is  the  basis  of  the  commercial  credit 
system  of  Canada. 

73.  Demand  deposits. — Demand  deposits  repre- 
sent amounts  due  to  individuals  and  firms  payable  on 
demand.  Xo  interest  is  paid  on  these  accounts  except 
in  special  cases  where  a  large  dormant  balance  is  kept 
which  could  otherwise  be  transferred  to  the  savings 
l»ank  department.  The  average  current  account  is 
frequently  run  at  a  loss,  and  were  it  not  for  the 
collateral  profits  accruing  from  the  connection  in  the 
sliape  of  exchange,  discount,  and  the  like,  the  burden 
of  oi)erating  them  would  be  serious.  The  average 
(ost  of  carrving  a  small  account  has  been  variouslv 
t'^tiniated  at  from  $15  to  $25  per  annum.  This 
(|ncstion  will  be  gone  into  more  fully  in  a  later 
chapter. 

In  order  to  prevent  the  abuse  of  the  checking  privi- 
lege some  of  the  banks  make  a  nominal  charge  for  car- 
rying small  checking  accounts,  but  it  is  a  question  even 
then  if  the  bank  comes  out  ahead. 

The  ratio  of  total  deposits  to  the  capital  and  reserve 


84 


1JANK1N(;    PUINCirLKS 


I 


t1 


of  the  average  bank  is  so  large  tlmt  even  a  small  increase 
in  the  interest  rate  or  in  the  expense  of  operating  the 
deposits  will  materially  affect  the  earnings  on  capital, 
unless,  as  has  already  been  pointed  out,  the  question  of 
maintaining  adeijuate  reserves  is  neglected.  In  a  lec- 
ture on  "Interdependence  of  Trade  and  Banking" 
CJeorge  II.  Pownall,  an  English  banker,  in  referring  to 
the  question  of  banking  profits,  says: 

Banking  would  not  be  possible  if  its  present  lines  were  seri- 
ously cbiinged.     We  liiivc  to  bear  in  mind   tbat  the  business 
of  bankinft-,  like  every  other  kind  of  business  of  long  standing, 
has   evolved    itself   by    daily-accumulating   experience.      I    be- 
lieve that  depositors  cantiot  expect  a  greater  return  than  tliey 
now  obtain,  unless  there  were  some  general  change  in  the  sup- 
ply  of,   and   the  demand   for,   loanable   capital.      Bankers   do 
not  take  in  deposit  money  as  an  investment  for  the  depositor. 
The  money  comes  in  at  the  will  of  its  owner,  without  notice, 
and  is  withdrawn  without  notice.     That  consideration  governs 
the  employment   by   bankers    of   their    deposit   money.     They 
have   individually   to   judge   from   the   circumstances    of  their 
particular  business   what   percentage   of   cash    to    their    total 
liabilities  they  need  to  keep  in  their  tills,  what  percentage  of 
cash   they   shall   keep   unemployed   to   ensure   the   public    con- 
fidence in  the  stability  of  their  institution,  and  what  percentage 
of  their  liabilities  to  tlie  public  shall  be  represented  by  first- 
class   securities,   and   first-class   securities   so   written  down    in 
price  that   nothing  but   an  e\tr  ordinai-y   public   catastrophe 
shall  reduce  their  selling  price  below  the  figures  at  which  they 
appear   on    the   balance-sheet,    and    so    produce    an    apparent 
deficiency  in   the  assets  of  the  bank.      To  keep  money   uiiem- 
ployed  is  to  lessen  earning  power;  to  hold  first-class  securities 
is  to  obtain  less  than  the  average  rate  of  return  on  money 
employed  in  lo.ans.  and  to  write  them  down  to  a  safe  level  is 
a  form  of  insurance  that  expert  opinion  demands  of  a  banker. 
Tt   is  not   only  from  within   that   these   matters   have   to   be 


ANALYSIS    OF    A    BANK    STATEMENT 


85 


lookfd  at,  it  is  also  from  without.  Tlitn-  is  a  larj^^c  ilass  of 
(lie  public  perfectly  able  to  reckon  up  the  safety  or  otherwise 
indicated  by  the  broad  lines  of  u  bank  balance-sheet,  and,  in 
the  long  run,  the  strongest  institutions  oet  the  deposits. 
Paradoxical  as  it  may  seem,  a  banker's  balance-sheet  must 
1  \liibit  an  ability  to  pay  any  proportion  of  the  banker'ii  lia- 
liilities  likely  to  be  called  for  l)y  nervous  people  in  times  of 
>tress,  not  merely  because  the  call  for  repayment  needs  to 
l)e  faced,  but  also  because  to  exhibit  strength  is  to  disincline 
people  to  make  the  demand. 

74.  Deposits  elsctclicrc. — These  amount  to  $6.90  ^ 
and  represent  deposits  by  individuals  and  firms  made 
ill  branches  outside  of  Canada.  Part  of  these  deposits 
in  all  probabiHty  bear  interest.  Combining  them  with 
the  deposits  maintained  by  foreign  banks  gives  a  total 
of  nearly  $9  representing  funds  supplied  by  depositors 
outside  of  Canada.  An  examination  of  the  asset  side 
of  the  statement  shows  that  the  greater  part  of  this 
amount  is  invested  as  a  quick  asset  in  call  loans  outside 
of  Canada  and  on  deposit  with  foreign  banks.  This 
<|iiestion  will  be  fully  considered  in  connection  with  call 
loans. 

7.J.  Due  banks  in  Canada. — Owing  to  the  fact  that 
|)raotically  every  Canadian  bank  is  represented  by 
branches  in  the  redemption  centers  and  other  large 
towns,  there  is  no  necessity  for  it  to  maintain  balances 
with  other  banks  for  the  protection  of  its  interests  at 
those  points,  and  any  balances  which  may  be  due  be- 
tween banks  in  Canada  are  merely  as  matters  of  con- 
venience in  connection  with  collection  arrangements. 

70.  Due  to  banks  in  foreign  countries. — Under  this 
iK'ading  are  included  all  amounts  due  *^o  foreign  cor- 
lespondents  and  represent  balances  which  are  main- 

'  Rpiid  thus:  "$6.90  out  of  every  StlOO  due  the  public." 


8(! 


RANKIXC;    riU\(  IPLKS 


r 


iii 

'i.  i. 


laiiied  by  hanks  ul'  (ircat  Britain,  I'liitcd  States,  Eu- 
rope and  elsewhere  which  have  business  relations  with 
Canada. 

77.  Doiiiiiiioii  and  provincial  governments. — The 
branches  ol"  the  banks  act  as  depositaries  ol*  the  nonun- 
ion and  provincial  governments,  and  transfer  funds  re- 
ceived at  their  various  branches  to  Ottawa  or  to  the  sev- 
eral provincial  capitals.  ^Ml  customs,  internal  revenue, 
and  Post  Otfice  receipts,  including  the  deposits  of  the 
Posta!  Savings  Bank,  are  deposited  by  the  federal  offi- 
cers in  the  local  branches  of  the  various  banks  through- 
out Canada,  and  are  transmitted  bv  them  to  Ottawa 
for  the  credit  of  the  government.  Government  checks 
of  every  description,  including  those  issued  on  account 
of  withdrawals  from  the  Postal  Savings  Bank,  are  by 
the  Bank  Act  payable  without  charge  at  any  branch  of 
any  bank  in  Canada. 

Although  the  collection  and  disbursement  of  the  na- 
tional revenues  involve  a  great  deal  of  work,  it  is  done 
v,  illinglv  bv  the  l)anks,  not  onlv  in  a  wav,  as  a  return 
for  the  note  issue  privilege,  but  also  as  an  appreciation 
of  the  practical  and  economical  manner  in  which  the 
government  handles  its  revenues  and  funds.  So  effi- 
ciently is  this  done  through  the  banks  that  no  disturb- 
ance is  ever  made  in  business  or  financial  circles  by  the 
movement  of  govermiient  moneys,  notwithstanding  their 
very  large  aggregate.  All  revenues  received  are  left 
wi*h  the  banks  for  commercial  use  until  ultimately  dis- 
bursed by  the  government.  There  is  no  wasteful  piling 
up  of  gold  in  government  vaults;  every  cent  is  allowed 
to  do  its  share  in  the  economic  development  of  the  coun- 
try until  Avanted. 

The  net  balance  due  to  the  government  may  be  mo- 
bile, and  at  times  comparatively  small,  but  the  principle 


ANALYSIS    OF    A    BANK    STATKMENT 


87 


is  sound  and  works  well  in  every  resi)eet.  It  would  be 
almost  impossible  to  devise  a  selieme  for  the  collection 
and  disbursement  of  government  revenues  that  would 
work  more  smoothly  or  efficiently. 

Canada  in  her  scientific  administration  of  government 
funds  differs  from  almost  every  other  country. 

The  balances  of  the  provincial  governments  consist 
principally  of  deposits  in  connection  with  the  Inland 
Revenue  bepartment  and  judiciary  accounts.  The  bal- 
ances due  the  Dominion  and  provincial  governments  are 
j)rivileged  claims  on  the  assets  of  a  bank  and  rank  ahead 
of  the  other  depositors. 

78.  Circulation.— The  nature  of  this  liability  has  been 
fully  explained  in  Chapter  V.  It  will  be  noticed  that 
the  amount  given  in  the  statement  is  less  than  the  paid- 
up  capital.  No  bank,  es[)ecially  one  with  numerous 
branches,  would  feel  safe  in  increasing  its  circulation 
over  this  margin  except  during  the  period  of  emergency 
currency.  During  that  period,  namely,  September  1 
to  February  28,  the  circulation  could  be  increased  to 
$1).10. 

In  addition  to  the  protection  offered  the  note-holder 
by  the  general  5  per  cent  redemption  fund  of  all  the 
banks,  the  statement  shows  that  the  circulation  of  $6.54 
is  protected  by  the  total  assets  of  the  bank  and  the 
double  liability  of  the  shareholder,  $120.39,  or  practi- 
cally over  $91  for  every  $5  in  circulation.  Both  the 
emergency  currency  and  the  central  gold  reserves  will 
under  certain  conditions  prove  of  great  advantage  both 
to  the  public  and  the  banks,  but  neither  will  be  profit- 
able to  the  banks.  The  emergency  currency  bearing 
interest  at  .5  per  cent  will  be  availed  of  at  a  decided 
loss,  while  the  central  gold  reserve  will  result  in  a 
small  loss. 


ss 


n.WKiMj  i'ui\(  ii»m:s 


I 


lb 


] 


U 


70.  Capital  and  nxvnr.  Tlie  lotal  liability  in  the 
public  is  eciiml  to  $88.ai  of  the  total  assets  and  the  bal- 
ance, $11.09,  belongs  to  the  proiJi-ietors  or  shareholders. 
The  latter  consists  of  capital,  ^(\.li',i,  and  reserve  and  un- 
divided profits,  ^rj.lH'}.  A  reference  to  the  profit  and  loss 
sheet  (Section  \)ll)  shows  that  the  dividends  declared  were 
ecpial  to  10  per  cent  of  the  capital,  or  .3.47  per  cent  on 
the  ca])ital  and  reserve.  The  net  profit  earned  on  capital 
and  reserve  is  1()..5()  per  cent,  or,  as  it  is  generally  pub- 
lished, 1  {).»()  per  cent  on  the  paid-up  cai)ital.  The  method 
of  l)asing  earnings  on  the  percentages  to  paid-up  capital 
is  a  misleading  one,  and  should  be  abandoned  by  the 
banks  and  financial  ])apers  or  used  only  in  conjunction 
with  the  percentage  on  cajjital  and  reserve.  To  base  earn- 
ings on  caj)ital  not  oidy  gives  an  erroneous  idea  to  the 
public  of  the  earning  powers  of  banks,  but  does  not  form 
a  fair  method  of  comparison. 

In  case  of  the  insolvency  of  a  bank  the  shareholders 
are  liable  to  be  called  upon  for  an  amount  equal  to  the 
j)ar  value  of  their  shares. 

80.  Specie  and  Dominion  notes. — Under  this  head- 
ing are  included  not  oidy  the  gold  and  large  legal  tender 
held  by  the  bank  for  its  cash  reserve  and  clearing  house 
settlements,  but  it  ii  hides  also  the  till  and  change 
money  at  the  various  branches.  The  latter,  however, 
forms  a  very  small  proportion  of  the  whole. 

The  only  reference  made  by  the  liank  Act  to  a  cash 
reserve  is  in  connection  with  the  recpiirement  that'  at 
least  40  per  cent  of  the  cash  reserve  nujst  consist  or  Do- 
minion notes.  It  is  left  entirely  to  the  judgment  of  the 
individual  banks  themselves  to  fix  their  own  cash  re- 
serves, and  the  experience  so  far  has  fully  borne  out  the 
"wisdom  of  non-interference  in  this  connection  on  the 
part  of  the  government.     Considering  that  practically 


ANALYSIS    Ol'    A    HANK    STATKAIKNT 


SI) 


all  the  till  money  is  in  the  I'orin  of  u  liank's  own  notes, 
the  uveruge  cash  reserve  niuintuined  by  the  bunks  of 
altout  10  per  cent  to  12  per  cent  has  proved  fully  ade- 
({iiate  at  all  times.  Some  hanks  maintain  a  higher  and 
some  a  slightly  lower  rate  than  tlie  above  according  to 
their  circumstances  or  re<iuirements,  the  ratio  varj'ing 
with  the  same  bank  at  different  times.  The  daily  re- 
(kinption  of  notes  and  checks  through  the  clearings  all 
over  Canada  acts  us  a  constant  check  to  any  tendency 
on  the  part  of  a  bank  to  lower  its  reserve  below  a  certain 
liinit. 

81.  Notes  and  checks  of  other  banks. — This  amount 
re  presents  notes  and  checks  of  other  banks  in  process  of 
clearing.  These  have  been  deposited  by  customers  dur- 
ing the  day,  and  in  the  ordinary  course  are  presented 
and  redeemed  through  the  "clearing"  the  following 
morning.  As  the  customer  is  given  credit  the  same  day 
and  the  bank  does  not  receive  returns  until  the  follow- 
ing (lay,  this  amount  represents  a  loss  of  one  day's  in- 
terest to  the  banks  and  forms  a  very  considerable  item 
in  the  course  of  a  year.  The  average  amount  outstand- 
ing under  this  heading  for  all  the  banks  iti  1912  was 
nearly  $70,000,000,  representing  a  steady  loan  to  the 
public  for  that  amount  without  interest.  The  average 
note  circulation  for  1012  was  $100,000,000;  this  item 
offset  it  70  per  cent.  In  addition  to  this  the  amount  of 
eliecks  in  transit  l)etween  the  branches  themselves  of  the 
different  banks  would  run  considerably  over  $100,- 
000,000. 

82.  Deposits  tcith  other  hanhs. — These  amounts  rep- 
resent the  balances  maintained  in  the  United  States, 
(ireat  Britain  and  elsewhere  in  connection  with  exchange 
njjerations,  and  make  also  a  very  useful  way  of  carrying 
a  certain  proportion  of  the  bank's  reserve.     These  bal- 


!)0 


nANKIN(i    IMUNC  IPLF.S 


! 


iuicc8  cuiiihiiied  uitli  sptrii-.  Doiniiiioii  notes  and  tlie 
notes  and  cheeks  of  other  hunks  i'onn  5i<18.'JH  of  the  total 
assets,  and  are  generally  known  as  <|niek  assets.  None 
of  the  <|niek  assets  earn  any  interest  with  the  exception 
of  a  few  of  the  hank  aecoinits,  on  whieli  a  lo.v  rate  of 
interest  is  sometimes  ohtained. 

88.  Scciiriliot. — The  secnrities  hehl  amount  to  $7.59 
of  the  total  assets  and  consist  of  miniieipal  honds  and 
other  first-chiss  in\estments.  The  hanks  are  not  re- 
stricted in  their  ehoiei-  of  this  chiss  of  security,  and  may 
purchase  not  only  government,  provincial,  and  municipal 
honds,  hut  also  the  honds  of  domestic  and  foreign  rail- 
ways and  industrial  corporations.  Banks  look  upon 
these  securities  as  a  kind  of  secondary  reserve,  and  m- 
clude  them  among  their  liquid  assets  along  with  the  call 
loans. 

84.  Call  UmuH  in  Cmiada. — Call  loans  in  Canada 
represent  a<lvances  made  to  hrokersand  other  customers, 
principally  the  former,  on  the  security  of  first-class 
stocks  and  honds,  with  an  average  margin  of  some 
twenty  points  IrIow  the  market  value  of  the  stock  and, 
if  loaned  conservatively  and  watched  carefully,  form  a 
safe  and  remunerati\e  asset. 

Call  loans  in  Canada  are  not  call  loans  in  the  strict 
acceptance  of  the  word.  The  securities  given  as  collat- 
eral have,  as  a  rule,  only  a  limited  market  principally 
confined  to  Canada.  Comparatively  few  of  them  are 
listed  on  the  stock  exchanges  of  Xew  York  and  London, 
and  they  consequently  cannot  he  looked  upon  as  a  means 
of  increasing  the  cash  reserve  of  the  country  in  case  of 
emergency.  An  individual  hank,  in  ordinary  times,  can 
of  course  reduce  its  call  loans  in  Canada  at  any  time  for 
its  own  purpose,  the  hrokers  simply  horrowing  from 
another  hank  to  meet  tiie  call,  but  in  a  general  emer- 


ANALYSIS    OK    A    HANK    STATKMK.NT 


01 


;;viKy  a  pi-oinpl   response  t"  a  call  by  a  eonsalcrahle 
miiiilur  of  hanks  vouUi  not  be  relied  upon. 

{ 'nder  these  eiretnnstanees  the  rate  of  interest  eliarge<l 
Mil  these  loans  is  eonsiderahly  liigher  than  that  ohtaln- 
iii..  on  slriellv  eall  loans  in  New  York  and  Lonchuj,  and 
is  only  slightly  lower  than  the  rate  eharged  on  conuner- 
cial  loans,  seUloni  falling  helow  3  \Kr  eent.  In  times 
ul  Hnaneial  stringeney  the  rate  on  eall  loans  is  generally 
iiij^her  than  the  eoininereial  rate,  whieh  remains  prac- 
tieally  unehanged. 

The  Canadian  eustonj  of  recjuiring  a  man  to  confine 
ills  borrowing  to  one  bank-  the  one-bank  poliey  as  it  is 
called  —does  not  apply  to  brokers  who  from  the  nature 
of  their  business  borrow  where  they  ean,  the  loans  de- 
jRiiding  entirely  on  the  seenrities  pledged,  rather  than 
(111  the  tinaneial  standing  of  the  borro"" -.  A  broker  is 
therefore  a  customer  of  one  bank  but  p  borrower  from 
tuany.  These  latter  naturally  look  after  their  own  com- 
mcreial  customers  first,  and  the  broker  not  being  a  reg- 
ular customer  is  of  only  secondary  consideration,  and  he 
is  loaned  any  surplus  money  of  the  bank  after  the  re- 
iHiircments  of  the  commercial  and  other  customers  have 
luen  met. 

lianks  are  fretjuently  accused  of  encouraging  specu- 
hition  on  the  stock  market  at  the  expense  of  their  com- 
mercial customers,  but  this  is  certaiidy  far  from  the  case, 
as  will  be  vouchsafed  for  by  any  broker. 

8.>.  Call  loans  clscicJnre. — The  call  loans  carried  by 
(rrtain  of  the  Inrgcr  banks  in  Xew  York  and  London 
sihjoct  them  to  a  great  deal  of  undeserved  criticism,  as 
it  is  a  common  l)elief  on  the  part  of  the  pu])lic  and  the 
average  newspaper  man  that  the  Canadian  banks  lend 
money  in  Xew  York  because  of  the  higher  rates  ob"  lir- 
j'.ble  there.    Such  criticism  betrays  a  total  ignorance  of 


92  BAXKINC;    PRINCIPLES 

the  nature  of  the  Canadian  bank  reserve  for,  if  these 
call  loans  were  not  maintained,  the  Canadian  borrower 
would  be  no  better  off  than  now.  The  banks  would  have 
no  alternative  but  to  carry  the  amount  in  jrold  in  their 
own  vaults.  This  would  not  only  mean  a  loss  of  earning 
power  to  the  banks,  but  would  also  cripple  them  in  the 
foreign  exchange  and  other  facilities  which  they  now 
offer  the  public. 

If  these  critics  would  take  the  trouble  to  examine 
the  government  statement  and  ascertain  the  net  amount 
of  Canadian  money,  which  is  invested  in  call  loans  out- 
side of  Canada,  they  would  be  doubtless  surprised  at 
the  results. 

Take  for  instance  the  foreign  loans  in  the  government 
statement  for  the  month  ended  June  30,  lorS: 

Assets: 

Balance  due  by  banks  in  the  United 

Kingdom.      $15,941,257 

IJa  ances  due  by  foreign  hanks JW,165.595 

Call  loans  elsewhere  than  in  Canada.  89,363,520 

Current    loans    elsewhere    than    in 

Canada 36,894,681 

$175,365,053 

Liabilities. 

Due  depositors   elsewhere   than    in 

Canada. $104,289,782 

Jnie  banks  m  I  nited  Kingdom 11,755,653 

Due  foreign  banks 7,656,846 

-^  $123,302,281 

Act  amount  supplied  by  Canada      52,062,772 

— $175,365,053 

The  critic  would  point  out  that  Canadian  banks  had 
over  $175,000,000  of  their  assets  in  foreign  loans  and 
bank-balances,  and  that  this  .should  be  loaned  to  Cana- 
dian borrowers.    They  .seldom  look  at  the  other  side  of 


AN^.LYSIS   OF    A    BANK    STATEMENT 


93 


the  return  which  sh  )\vs  that  over  $123,000,000  of  this 
amount  represents  outside  capital  on  deposit  in  the 
banks,  leaving  only  $52,000,000  as  the  actual  amount 
supplied  hy  Canadian  hanks  toward  a  very  important 
part  of  their  reserve.  This  is  only  3.42  per  cei.t  of  the 
total  assets,  an  insignificant  amount  compared  witi:  the 
real  benefits  which  it  creates. 

As  regards  earning  a  higher  rate  of  interest  in  the 
foreign  call  markets,  the  argument  is  fallacious.  The 
rate  for  call  loans  in  Canada  is  seldom  helow  5  per  cent, 
while  the  call  loan  rate  in  New  York  seldom  rises  above 
li  per  cent,  and  the  rates  on  call  and  short  loans  in  Lon- 
don are  usually  lower  than  those  which  prevail  in  New 
Vork.  The  average  rate  for  call  loans  in  Canada  dur- 
ing June,  1913,  was  6i  per  cent,  and  the  average  call 
loan  rate  in  New  York  during  the  same  period  was 
2.35  per  cent,  from  which  must  be  deducted  the  heavy 
state  tax  on  loans  of  foreign  corporations  in  New  York, 
whkh  made  the  net  rate  received  by  the  Canadian  banks 
less  than  2  per  cent.  At  this  rate  it  would  certainly  l)e 
to  the  advantage  of  the  banks  to  confine  themselves  en- 
tirely to  Canadian  call  loans  or  even  place  money  on 
deposit  with  each  other  at  3  per  cent.  The  banks,  how- 
ever, fully  realize  that  safety  must  be  considered  before 
profit,  and  that  the  investment  in  outside  call  loans  pro- 
vides the  best  form  of  reserve,  next  to  the  actual  gold 
in  their  vaidts. 

New  York  is  one  of  the  interriational  money  markets 
of  the  ^\()rld  to  which  funds  flow  freely  from  abroad. 
Gold  can  be  obtained  there  at  any  time.  The  Canadian 
banks  have  on  numei-ous  occasions  tested  their  ability  to 
licpiidate  loans  in  New  York  and  bring  them  to  Canada 
In  the  shape  of  gold.  New  York  is  within  half  a  day's 
journev  from  Montreal  or  Toronto,  and  to  all  intents 


94  MANKINCi    PUIN(  IIM.KS 

and  puriK)st's  is  just  as  t'onvcnieiit  as  it*  the  gold  were  kejit 
in  Montreal  or  Toronto. 

Sir  Kdniund  Walker,  in  an  interesting  artiele  in 
the  Monctarij  Times  on  tliis  siibjeet,  eonclndcs  with  I  lie 
following  example  of  the  aetual  working  of  this 
form  of  reserve  during  the  panie  of  1907: 

Tlwif  Hie  l);iiik.s  dr.iu  fncly  upon  Huir  fuiitls  out  of  ('hiiiuI.-i 
to  iiKot  the  rc(|uiriiiuiits  of  their  ('jiiiiunjin  l)usiiK'ss  w;is  vcrv 
conclusively  diiiionstrfited  at  the  time  of  the  hist  I'nited  States 
panic.  A''conhn<>;  to  the  Goveninient  Bank  Statement  of 
September  30,  precedinj^,  the  position  as  rej^ards  tlie  outside 
accounts  of  the  banks  was  as  foUows : 

Call  loans  oulsidi   of  Canada $63,158,601 

Current  loans  outside  Canada '25,704,092 

$88,952,69.'? 
Deposits  and  balances  due  outside  Canada .  .     76,178,950 

Net  amount  emi)loyed  outside  Canada.    .    .  $12,773,743 

Tlie  panic  in  tlie  I'nited  States  may  be  said  to  have  com- 
menced in  October,  1907,  and  at  November  30,  later,  the 
position  of  the  Cana(h'an  banks  as  regards  their  outside  ac- 
counts bad  dianged  to  tin-  following: 

Call  loans  outside  Canada $41,198.29;{ 

Current  loans  outside  Canada 23„576,315 

$64,774,608 
Deposits  and  balances  due  t)utside  ( "anada  .  .     67.616,113 

Net  balance  oirinif  hi/  Canadian  banks  out- 
side Canada $2,841,505 

The  tight  money  conditions  which  existed  in  Canada  at  the 
end  of  1907  and  the  early  part  of  1908,  led  in  all  parts  of  the 
country  to  a  chunor  against  the  banks,  who  were  accused  of 
lending  in  \ew  York  moneys  gathered  from  tlieir  Canadian 
customers  and  needed  in  Canada.     Rut  it  will  be  seen  fi,)!>!  the 


ANALYSIS  OF  A  BANK  STATEMENT 


95 


al)ove  figures  tlmt  (luring  a  period  wlien  cull  money  commanded 
vi'iy  high  rates  in  New  York,  tlie  Canadian  hanks  in  less  than 
two  months  reduced  their  call  loans  outside  of  Canada  by 
S^>!i,0()(),()()0  and  that  by  the  end  of  November,  instead  of  hav- 
iiijr  Canadian  funds  employed  outside  Canada,  the  balance  was 
iutually  the  other  way  to  the  extent  of  .^a.Si  1,000,  a  condi- 
tion of  affairs  which  continued  several  months  into  1908. 

In  the  payment  of  its  debts  «lue  abroad  or  in  selling  cx- 
(•lian"-e  against  commodities  shipped  by  Canada,  New  Y'ork 
is  the  market  where  all  such  transactions  nmst  be  settled,  and 
therefore  ready  money  to  be  available  in  the  operations  of  a 
Canadian  Bank  is,  in  the  majority  of  cases,  needed  in  New 
York. 

A  careful  examination  of  the  evidence  must  make  the  follow- 
ing clear  to  any  intelligc       person : 

1.  That  the  banks  lend  money  in  New  Y'ork  at  a  much 
lower  average  rate  than  loans  produce  in  Canada. 

1.  That  the  high  rates  of  interest  so  often  referred  to  oc- 
(iir  onlv  at  rare  occasions  coincident  with  panic,  and  do  not 
II!  erially  affect  the  average  rate  earned;  and  that  at  the  time 
of  such  high  rates  the  Canadian  banks  are  almost  always  with- 
( hawing  money  from  New  Y'ork  instead  of  sending  it  there. 

a.  It  is  the  power  to  withdraw  money  at  such  times  which 
(iiables  the  Canadian  bankers  to  support  their  customers,  and 
it  is  largely  because  of  this  power  that  altliough  the  financial 
hi>tory  of  the  I'nited  States  is  marked  with  frequent  panics, 
no  financial  panic  has  takeii  place  in  Canada  In  recent  times. 
4.  The  object  of  the  loans  in  the  ITnited  States,  therefore, 
is  not  to  enlarge  the  profits  of  the  Canadian  banks  but  to  en- 
able tliem  to  do  justice  to  their  customer-,  in  time  of  stress. 
Such  loans  arc  an  evidence  of  caution  and  wisdom  in  the  in- 
terest of  Canada  and  the  policy  sliould  be  tlie  subject  of  praise 
hy  critics  of  Canadian  banks  and  not  of  dispraise.^ 

86.  Reserves. — Including  call  loans  and  securities  the 
a\erage  reserve  maintained  l>y  the  Canadian  banks  lies 

'  Mniictarfi  riwc',  Toriiiilo,  .Tan.  (!,  li)J2. 


90 


BANKING    rillNCIPLES 


s; 


I 

ii 


between  35  per  cent  and  40  per  cent  of  the  total  assets, 
of  which  about  10  per  cent  is  in  cash  and  Dominion 
notes,  10  per  cent  in  amounts  due  from  other  banks,  and 
the  balance  in  securities  and  call  loans.     The  banking 
conditions  are  so  varied  in  the  different  sections  of  the 
country  and  in  different  institutions  that  it  would  he 
impossible  to  establish  a  fixed  legal  reserve  which  would 
suit  all  conditions  and  seasons.     Tast  experience  has 
demonstrated  that  the  question  may  safely  be  left  with 
the  individual  banks  themselves.     The  ca.h  reserve  of 
the  Canadian  banks  compares  favorably  with  the  gen- 
eral average  of  the  national  banks  of  tlie  United  States. 
The  fixed  legal  reserve  of  tlie  national  banks  of  the 
United  States  has  been  compared  to  certain  beds  in  a 
hospital  which  were  always  reserved  for  emergency,  and 
on  the  occasion  of  a  great  disaster  the  superintendent 
refused  to  permit  the  beds  to  be  used,  claiming  that  they 
were  to  be  reserved  for  emergencies.     To  establish  a 
legal  reserve  means  that  Avhen  a  bank  uses  its  reserve 
for  what  it  is  intended,  it  breaks  the  law  and  becomes 
subject  to  severe  penalties.     Although  there  is  no  law 
or  understanding  on  the  subject  in  Canada  it  is  gener- 
ally conceded  that  the  total  quick  assets  of  a  bank  should 
not  be  allowed  to  fall  below  15  per  cent,  of  which  at  least 
8  per  cent  sliall  be  in  ca.sh  and  the  })alance  in  notes  and 
checks  of  other  banks,  and  in  bank  balances.     In  the 
statement  under  consideration  it  will  })e  noticed  that  the 
quick  assets  amount  to  18.28  per  cent  and  liquid  assets 
to  34.84  per  cent,  or  nearly  40  per  cent  of  the  liabilities 
to  the  public. 

With  the  establishment  of  the  central  gold  reserves, 
certain  new  phases  will  arise  in  connection  with  the  com- 
putation of  the  cash  and  other  reserves.  This  feature 
has  been  very  clearly  explained  in  an  article  published 


ANALYSIS  OF  A  BANK  STATEMENT 


91 


ill  the  Financial  Times,  Montreal,  August  IG,  1013, 
which  reads  as  follows: 

That  the  new  system  will  iietissitiitc  a  sonicwhiit  diflVrcnt 
imthod  of  computing  tlie  strengtii  or  weakness  of  a  bank  in 
])()int  of  reserves  is  evident.  Or  rather,  wliile  tlio  method  will 
ivinain  the  same,  the  standard  will  have  to  he  adjusted.  The 
oold  deposited  in  the  Central  Reserve  cainiot,  it  is  plain,  be 
icfrarded  as  an  available  casli  reserve,  except  to  the  extent 
to  which  there  ?s  no  currency  issued  against  it.  Gold  which 
is  being  employed  as  the  basis  of  currency,  under  a  law  which 
ivquires  the  holding  of  a  full  dollar  in  specie  for  every  dollai 
of  the  corresponding  notes,  is  not  an  asset  at  all ;  but  neitlier, 
on  the  other  hand,  are  the  notes  a  liability.  The  issue  of  notes 
ji;fHinst  deposited  gold,  tlierefore,  decreases  the  amount  of  cash 
assets,  but  does  not  increase  the  amount  of  liabilities.  But 
the  proce  of  issuing  additional  currency  implies  the  receipt 
liy  the  bai.k  of  something  with  which  that  currency  is  pur- 
chased by  the  person  who  takes  it  out.  So  far  as  concerns 
tlio  special  additional  currency  taken  out  in  the  autumn  and 
returned  before  spring — which  is  the  only  class  of  circulation 
to  which  the  Gold  Reserve  clauses  will  at  present  apply,  since 
the  ordinary  issue  power  of  the  banks  up  to  the  limit  of  their 
capital,  without  gold  deposit  will  for  a  good  many  years  suffice 
to  look  after  the  all-thc-year-roinid  requirements  of  the  nation 
— practically  all  of  it  is  taken  from  the  banks  in  exchange  for 
grain  receipts,  drafts  on  grain  shipments,  and  similar  high- 
grade,  short-term,  readily  negotiable  securities,  Tliese  secu- 
rities have  in  themselves  a  certain  value  as  reserve.  They  arc 
not  to  be  discriminatcly  ranked  with  the  ordinary  commercial 
loan  wliich  forms  the  bulk  of  the  all-thc-ycar-round  business 
of  the  banks,  for  they  arc  based  upon  a  commodity  which  is 
at  all  times  salable,  and  they  possess  a  ncgotial)le  value  far 
in  excess  of  that  of  ordinary  commercial  paper.  In  addition 
to  this  they  will  be  steadily  disposed  of  by  the  banks  in  the 
international  money  market,  in  proportion  to  the  speed  v\Ith 
which  the  crop  moves  to  seaboai'd;  and  if  money  is  tight  and 
C— VTII— 7 


08 


BANKING    I'UlNCU'LliS 


f  I 


I 


,* 


rcsencs  low  it  is  in  tlie  power  of  the  banks  to  exert  muclj  pros- 
sure  to  get  the  crops  moved  rapidly — as  they  doubtless  will 
do  this  season.  So  tiiat  while  there  will  be  an  apparent  re- 
duction in  tlio  reserve  strength  of  many  if  not  all  the  banks 
when  grain  ])aynunts  ronnncnco,  it  will  be  nnu-h  more  apparent 
than  real;  and  the  gold  which  is  taken  from  the  banks'  control 
to  form  a  basis  for  the  extra  currency  can  in  case  of  need  ho 
replaced  without  any  great  difficulty  or  sacrifice. 

87.  Current  loans. — Current  loans  form  the  largest 
individual  item  in  the  statement,  and  consequently  rep- 
resent the  bulk  of  a  bank's  investment.  This  is  an  asset 
which  requires  the  most  careful  and  unremitting  atten- 
tion on  the  part  of  the  branch  manager  and  the  head 
office. 

Current  loans  can  Ix;  broadly  divided  into  advances  to 
customers  and  bills  and  notes  maturing.  The  latter  are 
the  more  desirable  because  they  are  principally  com- 
l)osed  of  trade  bills,  Avith  a  currency  of  from  sixty  to 
ni/iety  days,  and  as  a  rule  can  be  relied  upon  to  be  retired 
at  maturity.  A  good  portfolio  of  bills  is  no  mean  factor 
as  a  part  of  the  reserve.  Canadian  banks  as  a  rule  re- 
fuse to  take  longer  term  paper  than  that  of  three  or 
four  months  currency;  in  fact  the  average  currency  of 
a  good  bill  file  should  not  exceed  six  weeks,  which  would 
mean  a  steady  flow  of  money  coming  in  every  day,  even 
if  only  50  per  cent  of  the  items  maturing  were  paid  in 
full.i 

Advances  to  customers,  however,  cannot  be  relied  on 

'  An  interesting  calculation  may  be  made  in  any  office  hy  rebating  interest 
on  the  daily  total  of  the  maturing  notes  and  bills  in  the  diary.  The  total  thus 
arrived  at  will  show  the  amount  that  would  have  to  lie  rebated  supposipc  all  the 
notes  were  paid  on  the  day  .selected.  Taking  this  total  rebate,  ascertain  for  how 
iriiiny  J;iys  it  would  pay  interest  on  the  total  amount  of  unmatured  linit  Items. 
The  number  of  days  represents  the  average  currency  of  the  bill  file.  The  actual 
results  in  one  b-anch  varied  between  41  and  45  days  currencv. 


ANALYSIS    or    A   BANK    STATEMKNT 


99 


to  any  such  extent.     They  may  be  divided  into  four 

classes : 

(a)  ^Vdvaiices  made  to  customers  on  the  security 
(>r  pnuhu'c  and  other  merchandise; 

1 1))  Advances  made  to  customers  on  stocks,  bonds, 
imtis  and  otlier  coUaterals; 

(c)  Advances  made  to  customers  on  notes  other  than 
trade  bills;  and 

(d)  Advances  made  to  customers  on  single  nanie 
paper. 

Tlie  tirst  two  call  for  very  little  comment  and,  if  well 
margined,  form  a  desirable  asset.  The  third  class, 
.iltbough  secured  by  two  or  more  names,  is  not  so  de- 
sirable from  a  banker's  point  of  view,  as  it  may  comprise 
a  certain  amount  of  accommodation  paper.  Advances 
to  customers  by  means  of  single  name  notes  are  less  ob- 
jectionable providing  the  customer's  statement  shows  a 
sufficient  margin  of  quick  assets  to  warrant  the  loan, 
and  that  there  is  a  definite  understanding  between  the 
liank  and  the  customer  as  to  the  destination  of  the  loan, 
arid  when  and  how  the  advance  is  to  be  paid.  Occa- 
sionally this  latter  class  of  advance  is  made  by  means 
of  overdraft.  This,  however,  is  a  practice  that  should 
not  be  encouraged  as  it  is  objectionable  for  many  rea- 
sons which  well  be  given  later.^ 

It  is  the  two  latter  classes  of  notes  which  give  the 
most  anxiety  and  trouble  to  the  banker.  Unless  great 
cave  is  taken,  the  bank  is  a])t  to  become  a  partner,  as 
it  were,  in  more  or  less  undesirable  undertakings.  It 
is  here  we  find  the  dead  loans,  safe  enough  no  doubt  so 
*';'r  as  ultimate  payment  is  concerned,  but  still  not  bank- 
ing transactions. 

'Sco  section  210. 


\ 


100 


BANKIMJ    PHINC  iri.KS 


f 


;| 


Wi 


iVdvanccs  are  made  to  business  firnif  and  others  that 
arc  in  tlicir  way  more  or  less  permanent,  sometimes  con- 
sciously so,  sometimes  made  so  by  force  of  circumstances. 
How  can  payment  of  such  loans  be  obtained  within  a 
reasonable  time?  Or  in  case  of  failure  what  can  the 
bank  do  with  the  wornout  works  or  the  old-fashioned 
mill  ?  It  finds  itself  a  partner,  frequently  principal  part- 
ner in  the  business. 

It  is  therefore  most  necessary  for  a  bank  to  avoid 
advances  of  this  nature.  It  should  endeavor  to  keep  its 
loans  in  as  liquid  a  condition  as  possible,  and  in  reason- 
able proportion  to  its  deposits. 

Leroy-Boileau,  in  his  "Traite  d'Economie  Politique," 
says : 

Bunks  obtiiin  their  resources  jrenerally  from  the  most  mobile 
part  of  a  country's  capital — from  funds  scarcely  constituted, 
destined  for  an  investment  whose  character  has  not  been  de- 
termined or  for  consumption  sli»rhtly  postponed.  In  view  of 
tin's  origin  of  the  hirgcr  part  of  banking  resources,  it  follows 
that  the  capital  lent  by  banks  ought  always  to  remain  in  the 
condition  of  circulating  capital,  easily  convertible  into  mcmey, 
and  should  not  be  transformed  into  fixed  and  inconvertible 
capital.  Banks  are  instituted  to  make  eapital  circulate,  not 
to  lock  it  up. 

88.  Overdue  debts.— These  call  for  very  little  com- 
ment; the  greater  portion  consists  of  notes  which  are 
overdue  owing  to  temporary  delays  in  settlement. 
Farmers  are  notorious  delinquents  in  this  respe"*^.  They 
have,  however,  a  good  excuse  owing  to  the  distances  they 
generally  live  from  the  bank,  in  the  West  particularly. 
There  is  not  the  same  excuse,  however,  for  ordinary 
business  paper  being  overdue,  and  the  same  leniency  is 
not  extended  to  a  business  man,  whose  credit  is  seriously 
affected  if  he  allows  his  paper  to  frequent  the  overdue 


ANALYSIS    OF    A    RANK    STATKAIKNT 


KM 


lilc.    A  poilioii  oj'  khv  ovtnliic  coiisi^jls  of  doubtful  dehts 
lor  wliidi  I'uil  imnisioii  iuis  htrn  niiidi". 

89.  Jhal  CHtatc. — The  law  is  very  strict  as  to  banks 
Iioldiii^-  real  estate  other  than  that  re(iuired  for  their 
(»\\ii  premises,  nor  can  they  lend  on  mortgages.  They 
may,  however,  take  a  mortgage  as  additional  security  for 
a  debt  already  incurred,  arid  in  case  of  foreclosure  they 
are  allowed  to  bid  in  the  property,  but  cannot  hold  it 
Dver  a  certain  length  of  time.  Real  estate  other  than 
hank  i)remises,  in  the  statement,  represents  lands  which 
have  been  acquired  in  this  manner  and  bought  in  by 
the  bank  in  its  effort  to  improve  the  position  of  a  doubt- 
ful or  a  bad  debt.  Hanks  naturally  try  to  get  rid  of 
l)r()perty  thus  accpiired  as  (piickly  as  possible  and,  in 
making  sales,  frequently  sell  for  part  cash  and  tucept 
security  for  the  balance  in  the  shape  of  a  mortgage. 
Tiiese  are  shown  in  the  statement  as  "mortgages  on  real 
estate  sol<l." 

5)0.  Bank  premises.— The  Bank  Act  permits  banks 
to  own  real  estate  and  erect  buildings  for  the  purposes 
<>r  their  business.  It  has  always  been  a  question  as  to 
whether  banks  have  the  right  to  erect  a  building  and 
rent  any  part  not  required  for  banking  purjioses.  The 
([ucstion  is  not  a  serious  one  and  should  be  left  to  the 
hanks  themselves.  If  a  business  man  should  erect  a 
building  on  an  expensive  corner  in  a  city  simply  for  his 
own  office,  his  action  would  be  characterized  as  extrava- 
gant for  devoting  expensive  land  to  a  one-fioor  building 
when,  by  building  higher,  he  could  have  rented  sufficient 
offices  to  help  pay  the  cost  of  carrying  the  investment. 
Furthermore,  a  bank,  in  building,  must  consider  the  fu- 
ture, and  there  are  many  Instances  in  Canada  where  a 
building  that  was  erected  for  a  banking  office  with  upper 
floors  for  renting  is  now  wholly  occupied  bv  the  bank 
itself. 


10!^ 


HANKINd    IM{I\(  N'LKS 


H 


f 


Another  mutter  of  conniicnt  in  coniitrtioi,  uitli  Imnk 
pmnises  js  the  .substantial  and  han<ls(>nie  huihhnas 
wliieh  are  generally  erected  for  hanking  ortiees,  even  in 
a  small  town. 

There  are  several  reasons  why  a  hank  should  huild  a 
substantial  oftiee:  /ir,sl.  that  in  opening  a  branch  at  any 
point,  It  expects  to  be  represe.ited  there  i)er,nanentlv'; 
this  alone  should  warrant  the  erection  of  a  substantial 
building;  second,  it  is  a  well-known  fact  in  banking  that 
a  substantial  and  fine-appearing  building  is  the  one 
which  attracts  the  business  of  a  certain  class  of  the  pub- 
lie,  the  impression  of  permanency  and  solidity  being  un- 
consciously extended  to  the  standing  and  security  of  the 
bank  Itself;  third,  the  banks  are  in  a  measure  foVced  by 
I)ubhc  opinion,  when  building,  to  i,ut  up  an  office  that 
will  be  a  credit  to  the  town,  for  until  a  bank  owns  its 
own  premises  and  becomes  a  taxpayer  it  is  fretiuently 
reminded  of  the  fact  by  its  customer's  and  others. 

It  is  a  principle  of  sound  banking  that  bank  premises 
no  matter  how  valuable  for  their  especial  purpose,  must 
be  written  down  in  the  course  of  time  to  a  figure  con- 
siderably l,elow  cost  and  approximating  as  nearly  as 
possible  the  amount  they  might  be  expected  to  reilize 
at  a  forced  sale.  For  this  reason  all  well-managed  banks 
make  an  annual  appropriation  from  their  profits  for  the 
reduction  of  their  bank  premises  account,  and  the  ma- 
jority of  banks  now  have  their  premises  written  down 
to  a  conservative  valuation. 

In  the  case  of  some  of  the  older  bi.nks  tlie  values  are 
particularly  conservati^■e,  for  not  only  have  the  proi)er- 
ties  been  written  down  from  the  cost  price  of  many  years 
ago,  but  no  attention  is  paid  to  the  great  increase  in 
their  values  of  late  years,  in  common  with  all  other  Cana- 
dian city  property.    This  feature,  however,  may  be  eon- 


ANALYSIS  OF  A  BANK  STATKMKNT 


103 


sidt'ifd  as  offset  l)y  the  excessive  prices  Imiiks  have  had 
to  paj'  lor  any  property  purehased  recently. 

Some  of  the  larger  hanks  with  numerous  branches, 
instead  of  increasing  their  hank  premises  account  pre- 
fer to  arrange  with  some  trust  or  loan  company  to  erect 
a  proportion  of  the  buildings  for  them  on  a  rental  basis 
which  will  eventually  leave  the  property  clear  to  the 
hank. 

in.  Profit  and  loss  statement  of  a  bank. — A  study  of 
the  profit  and  loss  statement  of  the  various  Canadian 
hanks  for  the  past  years  shows  very  conclusively  that, 
notwithstanding  the  large  increase  in  the  amount  of  de- 
posits and  volume  of  business  transacted,  the  profits  have 
not  kept  pace  with  the  continuous  increase  in  operating 
expenses,  and  the  average  net  earnings  on  assets  during 
the  last  decade  has  dropped  from  1.50  per  cent  to  1.20 
per  cent.    Banks  in  common  with  all  other  business  con- 
cerns have  had  to  pay  out  more  in  salaries,  rents,  and 
other  expenses,  and  yet  it  is  seldom  realized  that  bank- 
ing charges  to  the  public  have  not  been  increased.    On 
tlie  contrary,  they  have  by  force  of  competition  and  other 
eauses  been  considerably  reduced.     The  table  on  page 
10.5  shows  the  percentage  of  net  earnings,  etc.,  of  ten 
of  the  Canadian  banks  for  the  year  1912.     It  affords 
several  interesting  comparisons  and  demonstrates  that 
tile  earnings  of  Canadian  banks  are  by  no  means  com- 
mensurate with  the  risk  and  work. 

Column  No.  1  will  assist  in  giving  the  reader  some 
idea  of  the  proportion  of  capital  and  reserve  to  total 
deposits,  or,  if  the  reverse  ratio  is  required,  it  will  be 
found  by  dividing  this  percentage  into  100;  thus,  the 
deposits  of  bank  Xo.  1  are  six  times  its  capital  and  re- 
serve. 

The  second  column  gives  the  proportion  of  the  total 


104 


HANKINT,    nilNdPI.ES 


assets  rtprc'Miilnl  l.y  iiiltivsl  .K|M)sil.s.  niul  .shows  whut 
a  very  importaiil  pari  the  intiicsl-hcariiig  ilqH>sits  take 
in  the  existence  of  u  hank  and  how  easily  a  slight  increase 
in  interest  would  materially  affect  the  net  profits. 

'J'he  third  column  gives  the  net  profits  earned  on  the 
total  assets  of  the  hanks.  CNuisidering  the  large  amount 
of  the  turnover  during  the  year,  and  the  douhle  liahil- 
ity  of  the  shareholders,  these  figures  constitute  a  very 
small  return  for  the  amount  of  work  done  and  risk 
taken. 

Column  No.  5  shows  tlie  i)crccntage  of  net  profit  to 
capital,  and  is  the  method  usually  adopted  hy  hanks  and 
financial  papers  in  commenting  ujwn  the  profit  and  loss 
sheet  of  a  hank.  As  it  shows  the  interest  on  only  a  part 
of  the  liahility  to  the  shareholder  this  percentage  affords 
no  useful  information,  unless  used  in  conjunction  with 
the  figures  given  in  column  Xo.  6.  This  gives  the  per- 
centage of  net  profits  to  capital  and  reserve  and  shows 
the  true  net  earnings  on  the  proprietor's  capital  before 
any  dividends  have  been  declared,  or  amounts  written  off. 
Column  Xo.  7  gives  the  percentage  of  net  earnings. 
These  two  lust  columns  will  show  where  the  market 
value  exeee<ls  the  hook  value  or  vice  versa. 

Column  Xo.  8  gives  the  actual  dividends  paid.  It 
will  be  noted  that  many  of  the  banks  prefer  to  give  their 
shareholders  an  increasetl  return  on  their  investment  in 
the  shape  of  a  bonus,  rather  than  an  increase  in  the  divi- 
dend rate.  It  is  evident  from  this  that  banks  are  un- 
willing to  make  a  jjcrmanent  increase  in  their  dividends 
in  case  they  might  not  be  able  to  maintain  it,  owing  to 
the  very  narrow  margin  of  [)rofit  on  which  they  have 
to  work. 

Column  X^o.  0  shc^ws  the  yield  on  the  market  price 


u 


w 


— *  « •» 

•^« 

1.x 

•  e 

s 

i* 
& 

M 

II  u 

25 

IS 

11 

A 

* 

"1 «» 

« 

:2 

22     "2 

KS 

<>• 

S 

u 

H 

y. 

U 

1 

Market 

PrkT-of 

Stork 

33    S3 

J! 

82 

S8 

10  X       X  2 

a  a 

X  X 

r>x 

52    82 

52 

;s 

8? 

1- 1-    i»2 

xe 

r-h- 

t-t- 

'a 

ss  ss 

X 

gs 

s;s 

j2g    2g 

•*  a 

22 

»  r- 

•f 

Assets  after 
allowing  6% 
on  Capital' 

s%  'ss 

S9 

S3 

ss 

« 

II 

33;  3;s; 

82 

g2 

1 

«l 

Percentage 

of  Interest 

Deposits 

to  toUl 

Assets 

g§5    §S 

55  = 

S52 

«.-5  V  s.-s 

2    SS 

2 

g§ 

§2 

F* 

and  Re 
to  tt 
Depo 

1-50      rj  — 

•0  «♦ 

1-  X 

s;: 

i 

1-  9«        «  ^ 

•0  w 

t-  X 

OS© 

5 


105 


100 


BANKINT,    PRIXCIPLKS 


I 


,1    m. 


on 


the 


Wasis    ol'    llie    figures    given    in 


of    the    stoek 
column  10. 

92.  Interest  on  deposits:— Vrom  time  to  time  it  is 
advanced  in  the  public  press  and  elsewhere  that  the 
hanks  should  pay  a  higher  rate  on  their  deposits  than 
3  per  cent,  especially  in  view  of  the  fact  that  they  are 
getting  G  per  cent  and  7  per  cent  for  their  money. 
Though  nearly  the  whole  of  a  bank's  gross  revenue  is 
derived  from  interest  on  its  loans,  the  net  profit  is  nec- 
essarily governed  by  tlie  difference  between  the  deposit 
and  loaning  rates  Avhich,  in  Canada  as  in  all  other  coun- 
+  !ies,  bear  a  fixed  ratio  to  each  other,  firmly  established 
'>  '  oth  theory  and  experience.    Any  attempt  to  deviate 
iiOiji  this  fundamental  rule  of  correlation,  either  by 
raising  the  deposit  rate,  or  unduly  lowering  the  loaning 
rate,  can  lead  to  but  one  end,  as  many  banks  have  found 
to  their  cost.     The  average  difference  between  the  de- 
posit and  loaning  rate  of  Canadian  banks  is  3  per  cent, 
and  any  increase  in  the  former  must  be  accompanied  by 
a  corresponding  increase  in  the  latter. 

That  this  is  no  arbitrary  ruling  can  be  conclusively 
proved  by  examining  the  profit  and  loss  statement  of 
any  bank  on  a  basis  of  giving  a  fair  return  to  the  share- 
holder for  his  investment,  it  being  first  conceded  that 
every  business  should  pay  interest  upon  the  capital  actu- 
ally invested  in  it  at  a  rate  determined  by  the  risk  or 
responsibility  incurred  in  the  business.  This  is  a  prac- 
tice that  no  business  man  will  question,  and  there  is  no 
reason  why  the  banking  business  should  be  excepted  from 
its  application. 

No  man  is  willing  to  invest  his  money  in  an  active 
business  which  involves  responsibility  and  the  meeting 
of  keen  competition,  unless  he  thinks  there  is  the  prob- 
ability of  more  than  an  ordinary  return  in  interest. 


t. 


?*f  . 


ANALYSIS    OF    A    RANK    STATEMFAT         107 

Hanking'  l)nsiiie,ss  is  certainly  not  Jnr  riotii  siicii  c'oinjK'- 
titioii,  risks,  and  responsibilities,  and  unless  a  hank  ean 
make  a  reasonable  i)rofit  ui)on  its  i)roprietors'  invest- 
iiRiit,  the  shareholders  niioht  as  well  put  the  bank  into 
li(|uidation  and  invest  their  capital  elsewhere  where  it 
■m\\  be  free  from  risks  of  this  nrture.    I  i  making  such 
ail  apportionment  from  banking  pre  Its  for  capital  in- 
Msted,  C  i)er  cent  should  be  conside   -d  a  very  reason- 
able rate  to  accord  to  shareiiolders  ic    the  use  of  their 
money,  and  after  deducting  that  amount  from  the  net 
profits  of  the  bank  the  remainder  represents  the  com- 
IRMsation  for  banking  services  and  the  like.    Tlie  appli- 
cation of  this  principle  to  the  annual  profit  and  loss 
siucts  of  the  banks  given  on  page  10.5  demonstrates 
\ciy  graphically  how  impossible  it  would  be  for  any 
of  these  banks  to  pay  a  higher  rate  than  3  per  cent 
nil  their  deposits  without  increasing  their  loaning  rate 
accordingly. 

Column  4.  in  the  table  on  page  105  shows  the  amount 
of  j)rofit  remaining,  after  deducting  6  per  cent  on  the 
capital  and  reserve  of  the  different  banks.  A  compari- 
son of  these  figures  with  those  given  in  tJie  second  column 
^vilI  show  that  only  one  bank,  the  fourth,  would  have 
Mitlicient  profit  left  to  increase  the  rate  on  its  interest 
deposits  one  per  cent;  the  remaining  banks  would  show 
a  serious  deficit.  That  Xo.  4  bank  could  increase 
Its  deposit  rate  to  4  per  cent  is  due  to  several  reasons, 
;'il  more  or  less  temporary.  In  the  first  place,  the  net 
I'n.lits  for  1012  happen  to  l)e  unusually  large;  secondly, 
;itio  of  cai>ital  to  total  deposits  is  small  (C^ohmm  No.' 
1 1 :  and,  lastly,  the  interest-liearing  deposits  are  only 
slightly  over  50  per  cent  of  the  total  assets  (Column 
N ' '  -i ) .  Similarly,  only  two  of  these  banks  could  afford 
^o  increase  their  rate  on  deposits  to  3i  per  cent 


but 


108  BANKING    PHIXCIPLES 

would  have  practically  notliiii<f  kit  lor  c\cii  ordinary 

appropriations  for  reserve,  de[)reciatioM,  and  the  like. 

93.  Profits  of  the  "Percentage  /?««/.'."— Rel'en-in-  to 

the  statement  of  the  "Percentage  Bank"  g'wen  on  pl^e 

70  the  following  profit  and  loss  sheet  of  that  hank  may 

prove  of  interest: 

Per  rent       Per  ccnl 
of  Total       of  Total 
Liabiliti/        Ax.sets 
to  Public 
The  net  profits  for  the  year  after  providing 

for  all  bad  and  doubtful  debts  amount 

to l.iJS  1.22 

Dividends  paid .72  ^ 

Written  off  bank  premises .15  .13 

Transferred  to  rest  account .16  .14 

Transferred  to  pension  fund 02  .02 

Balance  carried  forward .33  .29 

The  net  profit  is  found  after  paying  all  the  current 
expenses  of  the  hank  for  the  year,  and  providing  for  any 
loss  from  had  or  doubtful  debts.  The  shareholders  do 
not  by  aiiy  means  get  the  whole  of  the  net  profits,  only 
a  little  over  50  oer  cent  of  the  amount  being  paid  i!i 
dividends,  equal  to  10  per  cent  on  the  capital  or  .5]  per 
cent  on  the  capital  and  reserve  combined.  Of  the  bal- 
ance about  11  per  cent  is  applied  to  writing  off  bank 
premises  account,  12  per  cent  is  transferred  to  reserve 
or  rest  account,  a  small  amount  to  the  pension  fund  of 
tlie  bank,  and  24  per  cent  is  carried  forward  in  the  shape 
of  undivided  profits  for  contingency. 

94.  Bank  premises. — It  is  a  sound  theory  in  business 
life  that  no  jjlant  or  building  should  be  carried  at  cost 
on  the  books  of  an  institution  for  any  great  lengtli  of 
time,  but  that  each  year  a  certain  amount  should  be 
written  off  for  depreciation.  This  practice  is  followed  hy 
all  well-managed  banks.    It  must  be  remembered  in  this 


ANALYSIS    OF    A    BANK    STATEMENT 


109 


comiectioii  that  no  matter  how  suitable  a  building  may 
hv  lor  banking  purposes,  it  would  not  be  very  suitable 
lor  any  other  business  and  at  a  forced  sale  might  not 
realize  much  more  than  the  vahu  of  the  land.  Roughly, 
the  depreciation  in  the  statement  luider  discussion 
amounts  to  5  per  cent  of  the  bank  premises  and  ab- 
sorbs 11  per  cent  of  the  net  profits. 

O.J.  Reserve  fund. — The  rest  or  reserve  fund  of  a  bank 
is  now  looked  upon  in  the  light  of  a  greater  margin  of 
safety  to  the  depositors,  and  the  aim  of  every  bank  is 
evidently  to  make  the  reserve  fund  equal  to  the  capital. 
The  original  purpose  of  the  rest  fund  was  to  accumu- 
late the  surplus  profits  of  good  years  for  use  in  leaner 
years  to  maintain  dividends,  and  the  like,  if  necessary. 
Today,  however,  any  impairment  of  the  rest  fund  would 
he  considered  almost  as  serious  a  step  as  the  wiping  out 
of  part  of  the  capital  itself.  The  original  intention  of 
the  rest  fund  is  now  fulfilled  by  the  maintenance  of  a 
larger  amount  in  undivided  profits,  which  serves  exactly 
the  same  purpose.  The  general  manager  of  one  of  the 
i)anks,  in  his  annual  address,  referred  to  the  subject,  as 
follows : 


We  think  it  wise  to  keep  ji  substantial  amount  in  profit 
.111(1  loss  account,  sufficient  to  provide  for  any  reasonable  con- 
fin  <fency.  A  large  balance  at  the  credit  of  profit  and  loss 
account  is  a  most  desirable  and  available  reserve  and  is  a 
greater  protection  to  the  shareholders  than  the  same  amount 
ill  rest  account. 


The  rest  account  in  a  Canadian  bank  may  therefore 
he  considered  as  intended  for  the  protection  of  the  pub- 
lic, and  the  undivided  profits  for  the  protection  of  the 
shareholders. 

In  the  present  instance  about  12  per  cent  of  the  net 


I 


I 

f 


i! 


3  iii!7' 


4-t  'I 


I'lI 


^^®  HANKING    PRINCIPLKS 

profits  is  used  to  increase  the  reserve,  niakiiii?  the  latter 
80  per  cent  of  the  capital. 

OV,  Gross!  pro/ifs.~lt  has  already  l>een  pointed  out 
that  the  greater  portion  cf  a  hank's  ,,rofits  is  derived 
from  the  difference  hetwecn  the  interest  on  its  deposits 
and  Its  loans.  The  gross  profit  therefore  can  he  found 
roughly  hy  a  study  of  the  interest-hearing  assets  of  a 
bank,  and  it  may  be  safely  assumed  that  even  in  the  best 
of  years  a  hank  can  seldom  make  more  than  hetAveen  5 
and  6  per  cent  gross  on  its  total  assets;  that  is,  inelu- 
'':Y['J'''^'^''^^  «"d  «11  other  profits.  In  the  statement 
of  the  Percentage  Bank"  the  interest  earned  on  the  vari- 
ous assets  may  be  roughly  estimated,  as  follows: 

^^yt'^*^ $7.3})atli  34 

v^all  Loans 8  97       >'  j,- 

Currcnt  Loans n<i  n         ./  ^^ 

Real  Estate «  07       5         -^  '« 

Sundry  Profits,  Excliange,  etc. .  Jg 

Making  a  total  of JTio  or  5\% 

Turning  to  the  liability  side,  $88.31  is  due  to  the  pub- 
lic, of  which  It  is  safe  to  assume  $60  is  interest-bearing, 
absorbing  $1.80  of  the  gross  profits.     The  actual  net 
profits  are  $1.22.    The  difl-erenee,  or  $2.23,  has  therefore 
been  used  for  expenses,  including  allowance  for  bad 
debts.    These  figures  are  of  course  intended  to  be  sug- 
gestive, not  conclusive.     So  many  features  enter  into 
expense  distribution  and  the  gross  earnings  of  banks 
that  It  IS  impossible  to  establish  anv  criterion.    Some  of 
the  English  banks  publisV  the  amount  of  their  expenses, 
but  this  serves  no  useful  purpose  unless  other  data  is  also 
furnished.    The  fact  remains  that  Canadian  banks  are 
confronted  with  a  very  serious  and  steady  diminution  in 
net  profits  owing  to  competition,  on  the  one  hand,  and 
constantly  increasing  operating  expenses  and  taxation, 


ANALYSIS    OF    A    HANK    STATEMENT        111 

on  the  other.  This  situation  must  be  met  either  by  in- 
creasing the  charge,,  or  decreasing  the  expenses.  The 
'  iner  is  a  last  resort  and  there  remains  the  necessity 
>r  a  systematic  study  of  costs  with  a  view  to  reducing 
expenses  and  eliminating  accounts  or  transactions  which 
have  hitherto  been  a  source  of  loss.  Hank  cost  account- 
ing will  be  dealt  with  in  a  separate  chapter. 


1 


il 


PART  II:    BANKING  PRACTICE 


CIIAPTEP    I 


HEAD    OFFICE 


97.  The  directors. — The  nominal  executives  of  a 
l)ank  are  the  president  and  hoard  of  directors,  M'ho  are 
responsible  not  only  to  the  shareholders  but  to  the  gov- 
ernment for  the  true  and  faithful  administration  of  the 
Imiik's  affairs.  In  practice,  however,  the  actual  work 
of  administration  has  to  be  entrusted  to  the  general 
manager  and  his  staff.  The  work  of  the  directors  is 
rather  of  an  advisory  and  supervisory  nature.  That 
this  supervision,  however,  should  not  be  of  a  perfunc- 
tory character  is  demanded  in  no  uncertain  terms,  both 
l)y  the  Bank  Act  and  by  public  opinion. 

The  president,  as  chairman  of  the  board  of  directors, 
occupies  the  most  prominent  position  in  the  bank,  cs 
pccially  in  the  eyes  of  the  public,  and  should  always  be 
a  man  who  can  command  public  attention  and  respect. 
Ill  virtue  of  his  position  the  president  is  obliged  to 
devote  more  of  his  time  to  the  affairs  of  the  bank  than 
ills  brother  directors;  upon  him  devolves  the  checking 
and  signing  of  the  bank  returns  and  other  official  doc- 
uments. Daily,  in  conjunction  with  the  general  man- 
ager, he  must  review  the  position  and  general  policy 
of  the  bank. 

c— VIII-8  ll.T 


114 


BANKING    PHACTICE 


ii 


I 


li 


f-; 


Of  recent  years  the  j)iil)lic  has  demanded  "direetors 
who  direct."  No  man  should,  therefore,  accept  a  po- 
sition on  the  board  of  a  hank  unless  he  is  prepared  not 
only  to  attend  the  meetings  regularly,  but  also  to  take 
sufficient  time  to  become  accjuainted  with  banking  in 
general  and  the  affairs  of  his  own  bank  in  particular. 
In  other  respects  a  director  should  Ikj  a  man  of  outstand- 
ing (lualifications,  especially  as  regards  character  and 
influence  in  the  community;  he  should  also  be  a  man  of 
large  business  affairs  and  a  g(K)d  judge  of  men. 

The  principal  duty  of  the  directors  at  ordinary  board 
meetings  is  to  discuss  with  the  general  manager  and 
authorize  all  credits  and  loans  which  exceed  a  certain 
amount.  This  amount  or  limit  is  set  by  the  directors 
themselves,  as  it  would  be  physically  impossible  for  the 
board  to  deal  Mith  all  the  loans  made  by  a  bank.  The 
majority  of  these  can  safely  be  left  to  the  judgment 
of  the  general  manager,  leaving  the  large  and  important 
accounts  for  the  careful  consideration  of  the  board. 

There  are,  of  course,  some  losses  in  small  loans.  But 
the  supervision  of  the  directors  would  not  avert  them, 
and  the  average  is  never  high  enough  to  l)e  serious.  It 
is  the  larger  loans  which  call  for  the  constant  and  care- 
ful attention  of  the  directors.  Experience  shows  that 
bank  failures  arise  invariably  from  losses  made  by  the 
failure  of  a  small  number  of  large  accounts,  and  never 
from  any  trouble  caused  by  the  small  accounts.  The 
limit  varies  from  $1,000,  in  a  small  bank,  to  $5,000  or 
$10,000  in  a  large  bank.  In  setting  the  amount,  the 
directors  are  guided  by  their  opinion  of  and  confidence 
in  the  general  manager  and  his  staff,  as  well  as  by  the 
volume  of  applications  calling  for  consideration. 

Board  meetings  are  held  once  a  week  and  a  financial 
statement  of  the  affairs  of  the  bank  as  well  as  a  report 


HEAD    OFFICE 


115 


Inn  all  ini])()rtmit  transactions  that  have  taken  place  since 
Itln'  last  meeting  is  i)hice(l  before  them.  In  some  banks 
|;i  list  of  the  smaller  loans  authorized  by  the  general 
liiiaiiager  (luring  the  week  is  submitted,  and  initialed  by 
I  the  directors  after  reading.  The  duties  and  responsi- 
•ilities  of  the  ^)resident  and  directors  are  outlined  in  the 
I  Hank  Act. 

!>«.  The  general  matiager.— The  general  manager  oc- 
Iciinics  the  most  important  position  in  the  bank.     To 
attain  that  rank  a  man  must  not  only  be  a  professional 
banker  by  training  and  instinct,  but  must  possess  other 
outstanding  qualifications.     His  duties  are  numerous 
and  the  responsibility  heavy.    To  assist  the  general  man- 
ager in  his  work  of  supervision  and  control,  there  is  a 
I  head  office  staff  of  highly  trained  men.    If  the  bank  is 
|Iar<re,  an  assistant  general  manager  is  generally  ap- 
pointed to  assist  the  general  manager,  and  to  a  certain 
Ideirree  share  some  of  the  responsibility. 

The  following  officers  are  generally  found  on  the  head 
[office  staff  of  a  bank: 

An  assistant  general  manager; 
A  superintendent  of  branches; 
A  chief  inspector  and  officers  under  him; 
A  secretary  and  staff; 
A  chief  accountant  and  staff. 
A  former  general  manager  of  one  of  the  leading 
hanks,  :Mr.  George  Hague,  has  thus  summed  up  the  du- 
pes and  responsibilities  of  the  position: 

Tlio  office  of  general  manager  is  the  last  stage  in  the  evolu- 

|t>on  of  the  government  of  a  joint-stock  bank,  so  far  as  officers 

r.ro  concerned.     The  work  only  .-alses  when  a  bank  has  arrived 

\k  the  stage  of  development  Mhero  thi  bank  has  many  branches, 

|''i'l-  with  a  manager  at  the  head  of  it.     To  snpervise  all  these 


IIU 


HANKING    PRACTICE 


i9 


Kubonliiiute  tnunagers,  to  give  tiieiii  directions  from  time  to 
time,  iiixl  to  nmko  till  their  operations  Imrnionixc  with  the  work- 
ings of  the  bank  as  a  whole  under  the  directors,  is  the  duty 
of  the  general  manager.  The  title  implies  not  merely  that  In 
has  heads  of  departments  under  him — for  the  manager  of  a  I 
single  office  has — but  that  he  has  managers  under  him,  each  of 
whom  has  the  control  and  responsibility  of  his  own  office. 

The  position  of  general  manager  is  somewhat  analogous  tnl 
that  of  an  admiral  of  a  fleet,  which  fleet  consists  of  a  number | 
of  ships,  each  being  under  the  command  of  a  captain  who  i. 
supreme  in  his  own  sphere.     The  first  and  second  officers  inl 
such  a  ship  will  take  their  directions  from  the  captain,  while 
he  in  turn  is  subject  to  the  order  of  the  admiral.     The  admiral! 
himself  is  subject,  as  to  matters  of  general  policy,  to  the  gov- 
ernment.    It  is  the  admiral,  however,  who  is  looked  to  to  insure  I 
success  m  the  operations  of  the  fleet.     If  these  operations  are] 
successful  the  honor  is  his ;  if  unsuccessful,  the  disgrace  of  fail- 
ure appertains  to  him. 

The  analogy  between  this  and  the  functions  of  a  general  I 
manager  is  very  close.  He  is  a  servant  of  a  board  of  direetonj 
who  are  entrusted  by  law  with  functions  of  government.  Bull 
for  actual  and  effectual  carrying  out  of  these  functions  thevj 
are  largely  dependent  upon  the  general  manager.  He  givcsj 
them  advice  both  as  to  matters  of  general  policy  and  as  to  tkl 
details  of  operations.  This  advice  they  may  take  or  refuse  atl 
their  pleasure.  They  may  modify  it,  suggest  changes,  or,  ifl 
they  think  well,  reject  it.  This  they  have  the  power  to  do.| 
But  to  reject  entirely  the  advice  of  a  professional  banker  inl 
any  matter  of  importance,  involves  responsibility,  and  direc-l 
tors  will  scarcely  take  such  a  step  unless  for  very  good  reasons! 
This,  certainly,  should  only  occur  rarely  in  practice,  for  to  bcl 
often  rejecting  the  advice  of  a  general  manager  would  be  il 
sure  indication  for  the  necessity  of  a  change. 

His  position  with  regard  to  the  managers  under  h>m  is  onel 
of  undisputed  authoritj'.  It  is  to  him  they  look  for  dirccliosT 
as  to  the  course  of  the  business  of  the  branch.  And  his  order 
they  must  obey.     Otherwise  there  would  be  danger  of  serioul 


IIEAU   OFFICE 


117 


ml  .Imf  to  lliu  blink  us  u  wliolc.  For  briiiuh  iiiuimgiTs  to 
liiiity  tlicy  tun  uppoul  to  tlic  bourd  uguiust  a  gtncrttl  nmim- 
g.i's  directions  would  speedily  bring  ubout  n  dislocation  of 
tik'  wliole  business.  Kucli  branch  niunuger,  however,  is  su- 
I  piviiie  in  his  own  sphere.  To  him  his  officers  look  for  direc- 
tii)ii>,  and  his  orders  tliey  must  obey. 

'riitre  muy,  of  course,  urisc  cxtruordinftry  circumstances  in 
«lii(li  this  order  of  things  is  set  usidc,  but  the  foregoing  must 
be  taken  us  ordinury  practice. 

To  understand  properly  the  responsibilities  of  a  general 
I  iiiaim^rer  it  is  needful  that  the  powers  and  functions  of  each 
hiiaiich  of  the  bank  should  be  understood.  Every  individual 
l)raiich  carries  the  full  powers  and  responsibilities  of  the  bank 
witliin  itself.  To  the  general  public  and  to  the  body  of 
customers,  the  "branch"  is  the  bank.  For  every  dollar  of 
niomy  deposited  in  the  branch  the  whole  bank  is  responsible. 
For  every  engagement  to  lend  money  or  to  transmit  money  the 
bahk  is  responsible.  This  Is  tlie  strength  of  the  branch  system 
so  far  as  the  public  is  concerned. 

Hut  there  is  a  reverse  side.  For  every  failure  in  these  re- 
spects the  whole  bank  is  responsible.  If  at  a  certain  branch, 
even  the  least,  there  were  a  failure  to  perform  any  of  the  en- 
ffincments  it  had  entered  into,  the  whole  bank  would  be  dis- 
< Toditcd.  It  is  under  these  circumstances— and  they  press  upon 
liiiii  constantly— tliat  a  general  manager  exercises  the  functions 
"f  Ills  office.  These  functions  may  be  summed  up  in  one  sen- 
I  ten  re. 

It  is  his  business  to  sec  that  every  branch  during  every 
I  ".\v  is  properly  equipped  and  managed ;  that  it  has  a  sufficient 
•iii'l  Immediately  available  supply  of  money  of  every  kind  for 
j  tlie  wants  of  customers  and  the  public ;  that  the  money  lent  at 
Ibe  branch  is  lent  safely  and  according  to  directions;  that  the 
'"lis  discounted  are  good  bills ;  that  the  securities  taken  for 
loans  are  according  to  law;  that  delinquent  customers  are 
Niirply  looked  after;  that  proper  men  are  appointed  to  the 
various  departments;  that  the  accounts  are  properly  kept; 
tliat  proper  statements  of  the  business   are   forwarded  to  be 


118 


nANKlNC;    rUAtTICE 


.1 


i  ■ 


1; 


111 


iiiiti  iMfoie  the  «lint  lor»  unti  to  In  n  poitid  t(>  the  j;ovcrniiunt, 
uiul  fiiiullv.  llml  the  tush  on  hiiii<l  iilwiiys  ronespoiul-.  with 
the  umouiit  shown  in  the  books. 

99.  The  superintendent  of  luanelies.- -This  oincer,  in 
cotjjnuction  with  the  inspection  (lepartiiRnt  exercises  a 
strict  siiiK-'rvision  over  nil  l)rimeh  loans,  not  only  hy  a 
careful  study  of  the  hranch  returns,  hut  also  by  exam- 
ining and  passing  on  all  the  applications  for  credit  sub- 
mitted by  the  branches.  He  prepares  for  the  lM)ard  of 
directors,  with  his  recommendation,  all  applications  for 
credit  wiiich  are  large  or  important  enough  to  be 
brought  before  them,  and  assists  tiic  general  manager  in 
the  disposition  of  the  less  important  applications. 
Although  the  greater  part  of  the  superintendent's  work 
consists  in  dealing  with  the  branch  loans,  he  has  many 
other  duties  to  perform  in  connection  with  his  i)ositi()n, 
and  is  in  frequent  consultation  with  the  general  manager 
regarding  the  policy  and  position  of  the  bank.  The 
office  is  a  most  important  one  and  calls  for  special  quali- 
fications and  training. 

In  a  large  bank  w  ith  numerous  branches,  it  would  be 
physically  impossible  for  one  man  to  review  the  work 
of  the  whole  bank  in  this  manner,  and  many  of  the  banks 
divide  their  branches  into  provinces  or  districts  under 
the  charge  of  district  superintendents.  As  each  of  these 
officers  has  fifty  to  one  hundred  branches  to  look  after, 
the  position  of  district  or  provincial  superintendent  is 
also  an  important  one. 

In  a  small  bank  the  offices  of  superintendent  of 
branches  and  chief  inspector  are  often  merged  into  one, 
and  the  work  is  conducted  by  the  general  manager  and 
inspector.  In  the  larger  banks,  however,  the  loans  can 
only  be  comprehensively  dealt  with  by  a  process  of  sift- 
ing and  elimination,  according  to  size  and  importance. 


HEAD   OFFICE 


110 


All  loans,  irrespective  of  amount,  are  subject  to  con- 
stant supervision  both  in  the  returns  of  the  branch  and 
by  regular  inspections.    In  the  granting  of  these  loans, 
hl)wever,  conditions  vary  according  to  amount.    Ever^ 
branch  manager  is  accorded  a  limit  up  to  which  he  may 
lend  without  direct  reference  to  head  office,  the  amount 
varying  with  the  size  and  importance  of  the  branch. 
For  all  amounts  over  this  limit,  the  application,  with 
full  particulars  and  statements,  must  be  sent  to  the  su- 
l)erintendent  of  the  district  and  a  copy  of  the  corre- 
spondence to  head  office.    The  district  superintendent 
in  his  turn  has  a  limit  to  the  amount  he  can  authorize. 
If  a  prospective  loan  is  larger  than  he  can  deal  with,  he 
writes  to  the  head  office,  recommending  the  application 
or  otherwise,  the  head  office  already  being  in  possession 
of  the  particulars.    At  the  head  office  the  application 
is  dealt  with  by  the  superintendent  in  the  usual  way, 
and  either  authorized  forthwith  by  the  general  manager 
or  referred  to  the  board. 

100.  Chief  inspector.— As  has  been  indicated,  in  some 
banks  this  office  is  combined  with  that  of  the  superin- 
tendent, the  work  being  so  intimately  connected.    The 
chief  inspector  gives  special  attention  to  the  auditing 
and  inspection  of  the  branches  and  sees  that  every  branch 
is  inspected  at  irregular  intervals  at  least  once  a  year. 
As  a  rule  he  personally  conducts  the  inspection  of  the 
larger  branches  and  supervises  and  directs  the  other  in- 
spectors in  their  examination  of  the  rest  of  the  branches. 
An  inspection  consists  of  two  kinds  of  examinations, 
namely,  verification  and  valuation.    The  first  is  caUed 
the  audit  or  routine  inspection,  and  consists  of  audit- 
ing and  balancing  the  books  of  a  branch  and  ascertain- 
ing the  existence  of  all  the  assets  called  for  by  the  books. 
Attention  is  also  given  to  the  general  routine  work  of 


120 


BANKING    PRACTICE 


!!l 


the  office  with  a  view  to  seeing  if  instructions  from  the 
head  office  are  faithfull\  observed.  This  is  the  first  stage 
of  the  inspection,  and  is  made  by  routine  inspectors  or 
audit  officers. 

Tlie  second  stage,  or  inspection  proper,  is  made  by 
a  senior  inspector  and  consists  of  a  thorough  analysis 
and  valuation  of  the  loans  and  other  assets  of  the  branch. 
This  is  not  necessarily  made  at  the  same  time  as  the  audit, 
but  the  inspector  visits  the  branch  as  soon  as  possible 
afterwards  and  discusses  every  account  exhaustively 
with  the  manager.  On  his  return  to  the  head  office  he 
embodies  his  criticisms  in  the  official  correspondence 
with  the  branch. 

The  chief  inspector  generally  has  in  his  charge  all 
matters  pertaining  to  bookkeeping  methods,  disposi- 
tion of  the  junior  staff,  stationery  forms,  bank  premises, 
furniture,  etc.  Of  course  he  can  delegate  any  of  these  to 
the  care  of  one  of  the  inspectors. 

101.  The  secretary. — One  of  the  most  useful  officers 
in  the  head  office  is  an  efficient  secretary  with  initiative, 
tact,  and  a  good  memory.  The  secretary  forms  the  con- 
necting link  between  the  different  departments,  and 
through  his  hands  passes  all  the  correspondence  received 
or  despatched  by  the  head  office.  He  is  therefore  in  touch 
with  any  question  that  may  be  under  discussion  with 
any  of  the  branches,  and  if  possessed  of  a  good  memory 
is  frequently  able  to  refer  the  general  manager  or  in- 
spectors to  similar  instances  that  have  occurred  in  the 
past  at  other  branches.  The  secretary  generally  has 
charge  of  the  bank  advertising,  and  deals  with  all  minor 
matters  that  do  not  fall  within  the  province  of  the  other 
departments. 

The  general  diary  of  the  bank  is  kept  by  the  secretary, 
who  sees  that  all  the  returns  called  for  by  the  Bank  Act 


HEAD   OFFICE 


121 


are  promptly  dispatched,  dividends  and  meetings  duly 
advertised,  and  any  court  or  legal  business  looked  after 
l)y  the  officer  appointed  to  appear. 
'  102.  Chief  accoimtant.— This  officer,  though  seldom 
heard  of  by  the  public,  fills  a  most  important  place  in 
the  bank,  as  he  is  required  by  the  Bank  Act  to  join  with 
the  president  and  general  manager  in  certifying  to  the 
correctness  of  the  returns  made  to  the  government.    It 
is  his  duty  to  combine  the  branch  balance  sheets  so  as 
to  show  the  position  of  the  bank  as  a  whole,  and  submit  a 
true  copy  to  the  directors  every  week,  to  the  government 
every  month,  and  to  the  shareholders  every  year.    The 
stock  ledger  and  transfer  book  are  under  his  charge  as 
are  also  all  special  accounts  such  as  the  pension  and  guar- 
antee funds  of  the  bank. 

It  will  be  gathered  from  the  above  that  not  only  is 
tlie  general  manager  himself  thoroughly  in  touch  with 
the  affairs  of  the  bank,  but  he  has  also  a  highly  efficient 
staff  about  him,  all  able  to  make  helpful  suggestions  or 
if  necessary  take  the  initiative  in  any  matter.  Each  has 
his  own  well-defined  duties,  yet  is  able  to  assume  any 
other  work  if  called  upon,  and  all  are  imbued  with  one 
common  aim,  the  well-being  of  the  bank. 


ri 


Jl'il 


in 


CHAPTER   II 

HEAD    OFFICE    RECORDS 

103.  Head  office  hookJxceping.—A  distinction  must 
be  made  between  tbe  head  office  and  the  main  office  of 
a  bank.     By  head  office  is  always  meant  the  executive 
office  of  the  bank,  while  the  main  office,  though  gener- 
ally in  the  same  building,  is  simply  a  branch  office.    Not- 
withstanding its  size  and  importance,  its  relations  to 
head  office  are  exactly  the  same  as  the  most  distant 
branch  so  far  as  routine  matters  and  operation  are  con- 
cerned.   Its  business,  like  that  of  other  branches,  is  with 
the  public.    The  head  office,  on  the  other  hand,  transacts 
no  actual  business  with  the  public,  and  its  bookkeeping 
consists  principally  of  combining  and  analyzing  the 
statements  sent  in  from  the  various  branches.    Practi- 
cally all  of  this  work  is  done  in  the  chief  accountant's 
department.     The  machinery,  however,  is  surprisingly 
simi)le  considering  the  work  it  accomplishes. 

The  immediate  '  ooks  of  the  head  office  consist  of  a 
general  ledger,  a  cash  book,  a  correspondents'  ledger, 
with  controlling  account  m  the  general  ledger,  and  the 
stock  transfer  books. 

104.  The  ficncral  ledficr.— The  head  office  general 
ledger  contains  accounts  for  all  the  assets  and  liabili- 
ties of  the  bank  which  are  not  included  in  the  branch 
statements:  such  as  capital,  surplus,  undivided  profits, 

122 


HEAD    OFFICE    RECORDS 


h2(i 


lictitl  ortiee  investments,  general  expense  aceonnt,  and 

the  like. 

At  the  end  of  eaeh  month  every  braneh  sends  in  an 
ixaet  balance  sheet  of  its  general  ledger.  These  state- 
ments are  all  summarized  in  specially  ruled  books  or 
sheets  under  the  various  headings  of  the  accounts,  and, 
when  combined  with  the  balance  sheet  of  the  head  office 
general  ledger,  give  the  complete  statement  of  the 
hunk's  business  re(iuire(l  by  the  Bank  Act. 

xVttention  is  called  to  the  fact  that  after  allowing 
for  the  amount  due  to  or  from  the  head  office  itself,  the 
combined  debit  and  credit  balances  of  all  branch  clear- 
ing accounts  (Section  14-5)  will  exactly  offset  each  other 
with  the  exception  of  the  items  in  transit.  These  out- 
standing items  are  analyzed  and  allotted  to  their  several 
destinations  or  accounts,  and  there  is  consequently  no 
branch  clearings  account  balance  shown  in  either  the 
government  report  or  the  annual  reports. 

105.  Correspondents'  ledgers. — Every  bank  finds  it 
necessary,  for  exchange  and  other  purposes,  to  carry 
accounts  with   correspondents    in   Great   Britain,    the 
United  States  and  other  pcrLs  of  the  world.    For  sim- 
l)licity  and  directness  of  accounting  some  of  these  ac- 
counts are  frequently  carried  at  the  head  office,  and 
the  various  debits  and  credits  from  the  branches  are 
|)assed  through  the  branch  clearings  account  as  later 
explained  ( Section  147) .    As  the  entries  reach  the  head 
office  they  are  posted  direct  from  the  slips  to  the  several 
hiuik  accounts  in  a  special  ledger.    Statements  of  the  ac- 
counts are  received  from  the  various  correspondents 
weekly,  and  in  many  cases  daily,  and  the  accounts  are 
kept  in  constant  adjustment— any  item  outstanding  an 
undue  length  of  time  being  made  the  subject  of  im- 
mediate inquiry. 


124 


NANKING    rUACTICE 


\k  - 


lOG.  StntisHcul  houkn. — Apart  from  the  sharehold- 
ers' ledger  and  the  stock  transfer  books  which,  for  con- 
venience to  the  public,  are  generally  kept  in  the  main 
office,  all  the  books  used  in  the  head  office  are  prin- 
cipally of  a  statistical  or  analytical  nature.  The  profit 
and  loss  returns  from  the  ditt'erent  branches  are  all 
carefully  analyzed  in  relation  to  the  amount  of  busi- 
ness done  and  the  capital  employed.  (»ee  Figure 
Xo.  C.)  Daily  circulation  returns  are  compiled,  and  a 
close  watch  kept  on  the  movement  of  the  bank's  liquid 
assets.  Special  funds,  in  connection  with  guarantees, 
pensions,  and  the  like,  are  also  administered  from  this 
department. 

107.  Branch  clcarhigs. — The  checking  of  the  branch 
clearings  statements  received  from  the  branches  is  also 
in  charge  of  the  chief  accountant.  The  method  is  very 
simple.  An  ordinary  filing  clip  is  kept  for  each  branch; 
when  a  statement  is  received,  the  entries  are  ticked  off 
as  far  as  possible  against  the  entries  on  other  branch 
statements,  and  it  is  then  filed  on  its  clip  to  await  delayed 
responding  entries.  As  the  entries  on  each  sheet  are 
completely  marked  off,  a  diagonal  line  is  drawn  across 
the  statement,  and  whenever  a  balance  is  struck  by  the 
department  these  dead  sheets  are  filed  away  in  bundles. 
Some  banks  arrange  the  clips  in  ali)habetical  order, 
but  the  best  way  is  to  arrange  them  by  provinces  first, 
as  naturally  the  majority  of  the  entries  are  between 
branches  in  the  same  province.  The  checking  is  also 
more  concentrated  under  the  latter  system. 

108.  Stock  hooks,  etc. — In  the  shareholders'  or  stock 
ledger  an  account  is  kept  with  each  shareholder  in 
which  are  recorded  all  shares  bought  and  sold  (Figure 
7).  The  amounts  entered  in  the  account  represent  the 
]\ir  value  of  the  shares,  and  the  sum  of  all  the  balances 


EASTEllN  TOWNSHIPS  BANK 

BRANCH 191 


SEMI-ANNUAL  STATEMENT  OF  AVERAGES.  PERCENTAGES.  ETC 


2. 
3. 


\vERAOEa  n>B  Six  Months  Endisq 

AS  PER  Statement 

Resdebed  Head  Okfk  e  (Form  S. A.R.  9)  :— 
1 .    Average  Deposits  ott  Demand  (mclud- 

ing  Draft  Acit.  and  Profit) $ 

Average  Deposits  After  Notice $ 

Average  Loans  (including  Short  Date 
Drafts.  Overdrawn  a/ca.  Overdue 
Notes.  Real  HsUte  other  than  Bank 
Premises,  Mortgages  on  Real  Es- 
tate sold  and  Other  As.sets) : — 

Productive *$ 

Unproductive 9 

Tot^d  Deposits  and  Loans 

Average  Short  Date  Drafts  (included  in  No.  3) 


V.MOUNT  OF  E.  T.  Bank  Notk-s  Circulated.  Comi'uted  as  Follows :■ 

Balance  on  hand  six  months  ago $ 

Add  total  ret-eived  from  Branches  and 

Banks  (other  than  local) $ • 

Deduct  total  sent  to  Branches  and 

Banks  (other  than  local). $ 

Deduct  Balance  oil  'i\ud $ * 


I'uoFiT  AND  Loss  Statement.— 

Discount  and  Interc.t  Received  (le.ss 

rebates) ^ 

Inland  and  Foreign  Exchange ^  . 

Add  or  deduct  adjustment  of  Profit 
with  Head  Office 

Deduct  Interest  Paid  Depositors $ 

Deduct  Salaries  ($ )  and 

Charges  ($ ) ^•■ 

Net  Profit... 


$ 


Pekc-entages:—  ■ 

1.  Per  cent,  of  Discount  and  Interest  to  average  1  re- 

ductive Loans,  aliove  stated ■  •    • 

2.  Per  cent,  of  Discount  and  Interest  to  average  Pro- 

ductive I.<ians.  after  deducting  average  Short  Date 
Drafts,  alxive  .stated •    • 

3.  Per  cent,  of  Salaries  to  total  Deposits  and  Lwns  above 

stated , •  ■  ■ 

4.  Per  cent,  of  Charges  to  total  Deposits  and  Loans  above 

stated 


Above  figures  compiled  by 


Checked  by 


Figure  fi 
12.5 


c 
/o 


% 


% 


% 


.Manager 


a    -3 
o    < 

a 

u 

o 

<. 

ei 
o 

Ci4 


n 


rr. 


9! 

■J 
o 


l"o?i 


H 

g 


120 


HEAD   OFFICE    RECORDS 


127 


ill  this  ledger  will  equal  the  amount  of  the  paid-up  cap- 
ital of  the  bank. 

The  shares  of  a  bank  are  transferable  only  on  the 
l,„„ks  of   the   bank;  these   are  known   as   "Transfer 
liooks."    Each  page  of  the  transfer  book  is  in  the  form 
„[•  a  legal  document  by  which  one  person  agrees  to 
transfer  a  certain  number  of  shares  standing  in  his  name 
to  another  person  who  agrees  to  accept  the  shares.    The 
transfer  must  l)e  executed  by  both  parties  in  person  or 
l,v  a  properly  executed  power  of  attorney  appointing 
some  one  to  act  for  them.     The  entries  in  the  stock 
ledger  are  made  direct  from  the  transfer  book. 
The  other  books  used  in  the  stock  department  are  a 
Register  of  Stock  Certificates  Issued"  and  a  "Dividend 
Register."    The  stock  certificates  issued  are  not  trans- 
ferable, and  need  not  be  presented  when  a  transfer  is 

made. 

Dividends  are  usually  paid  quarterly  by  check  to 
shareholders  of  record  on  certain  dates,  and  the  dividend 
register  is  simply  a  record  of  the  payees  and  amounts 
of  checks  issued. 

A  bank  may  keep  transfer  registers  in  other  prov- 
inces than  that  in  which  the  head  office  is  situated.  The 
hooks  consist  of  a  stock  ledger  (a  duplicate  being  kept 
at  the  head  office) ,  in  which  is  kept  the  accounts  of  share- 
holders residing  within  the  province,  a  transfer  book 
and  a  register  of  stock  certificates  issued.  The  head 
office  is  advised  regularly  of  all  transfers  made,  and 
altiiough  certificates  are  issued  at  the  branch  office,  all 
dividend  checks  are  issued  at  the  head  office. 

109.  Circulation  records.— An  important  duty  of  the 
chief  accountant  is  to  watch  the  circulation  closely  and 
see  that  an  over-issue  does  not  occur.  Reports  are  re- 
us to  the  amount 


ceiv 


ed  daily  from  the  larger  bratid 


11  ii 


128  BANKING    rUACTICE 

of  notes  on  hand,  and  weekly  from  the  smaller  branches, 
and  from  these  the  exact  position  of  the  note  issue  is 
determined. 

Although  a  bank,  under  ordinary  circumstances,  can 
issue  notes  only  to  the  amount  of  its  paid-up  capital,  tiie 
invariable  practice  is  to  carry  a  large  supply  of  circula- 
tion in  the  tills  of  the  branches  throughout  the  country  so 
as  to  be  ready  to  meet,  without  delay,  the  requirements 
for  circulation  at  any  point.  A  bank,  for  instance,  with 
a  paid-up  capital  of  $3,000,000  would  probably  have  at 
least  $5,000,000  at  the  credit  of  bank  note  account  in  the 
head  office  general  ledger.  Part  of  this  amount  would 
be  represented  by  notes  on  hand  in  the  head  office,  part 
by  notes  in  the  branch  tills,  and  the  balance  would  rep- 
resent the  amount  of  circulation  outstanding. 

At  credit  bank  note  account $5,000,000 

Less: 

Unsigned  notes. $500,000 

Soiled  and  mutilated  notes  awaiting 

destruction 400,000 

Notes  held  in  the  tills  of  the  branches .     1,400,000 

$2,300,000    2,300,000 

Total  amount  of  outstanding  circulation  in 

the  hands  of  the  public $2,700,000 

This  leaves  a  margin  of  $300,000  unissued,  the  dif- 
ference between  authorized  circulation  and  actual  cir- 
culation. 

When  the  circulation  reaches  within  10  per  cent  of 
the  limit,  it  requires  very  careful  watching,  especially 
if  the  bank  has  numerous  branches.  It  is  frequently 
necessary  to  send  out  instructions  to  pay  out  other  bills 
in  order  to  avoid  an  over-issue.  With  the  establishment 
of  the  central  gold  reserve  this  very  serious  and  disa- 
greeable danger  of  over-issue  will  be  eluninated. 


HEAD   OFFICE    RECORDS 


130 


Changes  in  the  bank  note  account  are  infrequent  and 
occur  only  when  notes  received  from  the  engraver  are 
credited,  or  when  a  debit  entry  is  made  of  the  amount 
of  mutilated  bills  destroyed  by  the  directors. 

Soiled  and  mutilated  notes  are  counted  and  burned 
l)y  the  directors  whenever  a  sufficient  quantity  has  ac- 
cumulated. A  special  furnace  is  used  for  this  purpose, 
and  as  soon  as  the  bills  are  counted  they  are  placed  in 
the  furnace  by  the  directors,  where  they  are  rapidly  con- 
sumed. As  an  additional  safeguard  each  door  of  the  fur- 
nace is  provided  with  two  padlocks,  one  lock  controlled 
by  the  general  manager  and  the  other  by  the  directors. 
A  statement  showing  the  amount  and  denomination  of 
the  notes  destroyed  is  then  signed  by  the  directors  to  be 
attached  to  the  monthly  circulation  return. 

In  the  note  circulation  register  a  complete  record  of 
the  various  issues  is  kept,  as  well  as  of  all  the  denomina- 
tions of  the  notes  themselves. 

110.  Returns  to  head  office. — Every  branch  sends 
to  the  head  office  a  number  of  statements  and  returns. 
These  statements  go  under  different  names  in  the  vari- 
ous banks  though  they  vary  but  little  in  their  intention 
and  in  the  information  conveyed.  It  is  most  important 
that  all  returns  should  be  carefully  prepared  and  leg- 
ibly written  by  the  branch.  An  error  in  any  one  of  them 
is  serious:  it  involves  the  head  office  in  a  great  deal  of  un- 
necessary work  in  locating  the  difference,  and,  obvi- 

i  on  sly,  is  a  serious  reflection  on  the  ability  of  the  officers 
^\hose  signatures  attest  the  correctness  of  the  figures. 
The  principal  statements  are  as  follows: 

111.  Branch  clearings  statement  (daily) .—This  is 
forwarded  to  head  office  as  soon  as  the  cash  book  for 
the  previous  business  day  has  lieen  checked  (see  Figure 
23) .    It  is  signed  by  the  cash-])ook  clerk  and  checked  in 

C-VIII— 9 


-1. 1- 

«   .  i 


'  s 


! 


it 


i;U)  BANKING    rUACTICE 

every  particular  by  the  accountant,  who  also  signs  in 
attestation  of  its  correctness. 

112.  Financial  statement.— This  is  forwarded  daily 
by  the  larger,  and  weekly  by  the  smaller  branches.  It 
is'  practically  a  balance  sheet  of  the  branch  general 
ledger,  either  in  exact  figures  or  approximately  in  even 
thousands.  It  is  important  that  this  statement  should 
be  despatched  promptly,  as  the  data  are  necessary  to  the 
chief  accountant  in  arriving  at  the  amount  of  circulation 
outstanding  and  the  general  movements  of  the  bank's 
assets  and  liabilities.  A  complete  balance  sheet  is  ren- 
dered on  the  last  day  of  the  month. 

113.  Discount  report.— In  somt  banks  this  is  sent  in 
daily,  and  in  some  weekly.    If  sent  in  daily,  it  generally 
takes  the  form  of  a  carbon  copy  of  the  discount  register, 
with  the  manager's  comments  or  explanations  of  the  dif- 
ferent transactions.    If  a  weekly  statement,  only  transac- 
tions above  a  certain  amount  are  reported.    The  limit 
varies  with  the  importance  of  the  branch.   All  overdrafts, 
no  matter  how  small,  are  reported  with  explanations. 
All  liability  accounts  in  the  branch  which  are  out  of  order 
in  any  way,  either  by  the  expiration  of  the  credit  or  for 
other  reasons,  are  listed  in  each  report  until  they  have 
been  adjusted  to  conform  to  head  office  requirements. 

114.  Cash  item  account.— This  return  is  made  up  at 
least  once  a  month  and  gives  the  outstanding  sight 
drafts  and  other  items  with  the  date  of  origin  and  dom- 
icile. A  special  report  should  be  given  on  any  item 
which  appears  to  be  too  long  outstanding,  thus  antici- 
pating inquiries  from  the  head  office.  No  item  should 
be  debited  to  this  account  if  there  is  any  likelihood  of 
its  being  outstanding  for  more  than  a  week  or  ten  days 
at  the  most.     (See  Section  143.) 

115,  Balance  sheet.— This  is  made  up  to  the  close  of 


HEAD   OFFICE    RECORDS 


ISl 


business  on  the  last  day  of  the  month,  and  mailed  to  the 
head  office  not  later  than  the  following  business  day. 
It  is  an  exact  statement  of  the  general  ledger  of  the 
brunch,  and  is  used  by  the  head  office  in  compiling  the 
jreiieral  statement  of  the  bank,  or  monthly  return  to  the 
government,  as  it  is  generally  called. 

116.  Overdue  hilh. — This  statement  is  required  at 
kast  once  a  month,  and  gives  a  list  of  all  overdue  loans 
and  discounts.  It  should  be  the  ambition  of  every 
manager  to  keep  this  list  down  to  a  low  point,  if  not 
entirely  to  eliminate  it.  Any  name  wliich  appears  fre- 
quently in  this  list  should  be  avoided:  it  shows  a  lack  of 
business  honor,  or  something  worse. 

117.  Monthly  liability  return. — This  return  gives  a 
list  of  all  the  liability  accounts  on  the  books  of  the  branch 
over  a  certain  amount  with  all  necessary  particulars  re- 
garding security,  etc.  Some  banks  require  the  monthly 
liability  return  to  contain  the  name  of,  and  amount  due 
by,  every  obligant,  no  matter  how  small. 

118.  Sundry  returns. — Statements  of  the  expense 
account  of  each  branch,  accompanied  by  the  relative 
vouchers,  are  sent  every  month  to  head  office.  The  clos- 
ing of  the  books  at  the  end  of  the  bank's  fiscal  year  calls 
for  a  number  of  returns  for  statistical  and  other  pur- 
poses, such  as  the  profit  and  loss  statement,  the  report 
on  bank  premises*  the  bad  and  doubtful  debts  return, 
and  the  like.  In  addition  to  these,  special  reports  on 
various  subjects  may  be  called  for  from  time  to  time 
by  head  office. 

119.  Weekly  report  on  business. — In  discussing  the 
Canadian  banking  system,  frequent  reference  is  made  to 
the  very  full  knowledge  possessed  by  the  general  man- 
agers as  to  the  condition  and  requirements  of  the  coun- 
try as  a  whole.    This  information  is  acquired  through 


139 


BANKINd    rUACTICK 


lii 


two  separate  channels:  the  weekly  financial  statement 
and  the  weekly  report  on  business.  The  weekly  finan- 
cial statement  from  the  different  branches  shows  the 
fluctuation  of  the  circulation,  loans,  deposits,  etc., 
throughout  the  country,  and  forms  an  excellent  finan- 
cial barometer  of  business  conditions.  The  information 
in  these  statements  is  .supi)lemented  by  weekly  or  fort- 
nightly letters  from  the  branch  managers  which,  as  a  rule, 
cover  the  ground  most  thoroughly,  and  give  a  variety  of 
interesting  and  useful  facts.  Among  other  things  with 
which  the  letter  deals  may  be  mentioned  the  following: 

(a)  Particulars  as  to  prices  and  movements  of  staple 

commodities  such  as  grnin,  flour,  cattle,  dairy 
produce,  lumber,  etc. 

(b)  Acreage,  condition,  and  prospects  of  crops,  etc. 

(c)  Farm  sales  and  other  real  estate  transactions. 

(d)  The  conditions  of  trade  locally,  scarcity  or  other- 

wise of  money,  general  financial  and  commer- 
cial news. 

(e)  Business  failures  or  indications  of  beginnings  of 

unsoundness  in  local  firms,  whether  customers 
or  not. 

(f )  I^ocal  rates  for  money,  domestic  and  foreign  ex- 

change, etc. 

It  is  easily  seen  that  no  press  association  or  mercantile 
agency  could  possibly  give  the  intimate  information  as 
to  the  country's  condition  thus  afforded  the  general  man- 
agers through  the  branches.  By  means  of  information 
thus  regularly  afforded,  Canadian  banks  are  able  to  see 
the  coming  financial  clouds  six  months  or  even  a  year 
before  they  appear  on  the  commercial  horizon,  and  thus 
not  only  to  take  the  necessary  steps  to  prepare  them- 
selves for  trouble,  but  also,  in  the  annual  reports  of  the 


HKAD    OFFICE    RECORPS 


1S3 


l)ank,  to  warn  llieir  customers  and  the  public  generally 
of  the  approaching  storm. 

120.  Records  of  routine  icork—Ai  the  end  of  each 
month  there  is  forwartled  to  the  head  office  a  certiHcale 
signed  hy  the  manager  and  accountant,  which  certifies 
to  tile  following: 

That  all  the  general  statements  and  work  of  the  of- 
fice htrve  been  completed  and  verified  for  the 

month. 
That  all  the  overdrafts  shown  in  the  deposit  ledger 
during  the  month  were  authorized  by  the  man- 
ager. 
That  the  liabilities  of  customers  as  shown  in  the  lia- 
bility ledger  are  correct. 
That  all  interest  computations  in  the  discount  and 
ledger  departments  have  been  independently  veri- 
fied by  a  second  and  competent  officer. 
That  all  insurance  held  is  in  force. 
That  the  time-lock  is  running  correctly  and  the  com- 
bination locks  are  in  satisfactory  condition. 
That  the  cash  items  account  was  drawn  off,  and 

that  all  outstanding  items  were  satisfactory. 
That  the  current  deposit  ledger,  savings  bank,  and 
liability   ledger  balances  were  drawn  off  and 
found  to  be  correct. 
That  the  notes,  bills,  and  collaterals  were  inven- 
toried and  balanced. 
That  the  collection   register   has  been  regularly 
checked,  and  that  there  were  no  unsatisfactory 
outstanding  items. 
That  goods  pledged  or  warehoused  have  been  ex- 
amined and  found  correct. 
That  the  draft  account  has  been  balanced. 


134 


BANKING   PRACTICE 


>  ! 


The  dates  on  which  these  several  balances  were  arrived 
at  are  given,  as  well  as  the  initials  of  the  oflf'.  .10 
made  the  check. 

It  is  essential  that  a  complete  record  of  daily  routine 
work,  etc.,  should  be  maintained,  and  some  banks  re- 
quire monthly  reports  from  their  branches  giving  the 
initials  of  the  officers  who  fulfill  the  various  duties  each 
day.  Even  if  this  report  is  not  required  by  head  office 
it  is  advisable  to  keep  a  systematic  record  in  the  office. 
Figure  8  is  comprehensive  for  this  purpose. 


h^ 


CHAPTER   III 


THE    BRANCH    STAFF 


121.  The  manager.— The  directors  are  obliged  to  rely 
oil  the  general  manager  to  a  great  extent  for  the  compe- 
tent administration  of  the  bank's  affairs,  and  he,  in  his 
turn,  has  to  look  to  the  branch  managers  and  their  staff 
for  an  efficient  and  loyal  discharge  of  duties,  for  on  the 
staff,  more  than  on  any  other  factor,  depends  the  suc- 
cess of  the  bank. 

The  making  of  loans  is  a  corollary  of  having  the 
money  to  loan,  and  consequently  the  most  important 
work  of  a  manager  is  to  attrac     tid  accumulate  deposits 
by  giving  a  satisfactory  and  efficient  service  to  customers 
aiid  the  public  at  large.     There  is  no  difficulty  about 
making  loans;  the  difficulty  is  to  know  when  to  refuse 
to  make  them.    The  head  office  can  always  assist  in  the 
decision,  but  the  manager  has  only  the  general  standing 
of  the  bank  and  his  own  efforts  to  rely  on  for  obtaining 
deposits.    The  value  of  a  good  loaning  branch  is  not  de- 
nied, nor  the  fact  that  loans  frequently  create  deposits; 
but  banking  essentials  should  be  considered  in  their 
proper  sequence;  first,  deposits,  then  loans.    No  bank 
would  open  a  branch  simply  to  make  loans;  deposits  or 
other  collateral  advantages  must  be  present  or  in  pros- 
l)ect.     That  the  loans  at  a  branch  may  exceed  the  de- 
posits does  not  alter  the  principle. 
To  attract  deposits,  personality,  efficient  service  and 

135 


136 


BANKING    PRACTICE 


a  knowledge  of  human  nature  are  necessary,  but  the 
loaning  of  money,  in  addition,  calls  for  a  high  degree 
of  tact,  ability,  and  technical  training.  In  small  transac- 
tions the  manager  exercises  his  own  discretion,  within 
certain  limits  established  by  the  head  office  for  each 
branch  or  manager.  I^oans  exceeding  this  amount  must 
first  be  submitted  to  the  general  manager  for  author- 
ization. The  requisites  of  a  good  loan  will  be  dealt  with 
in  another  chapter. 

The  manager  has  many  other  duties  and  responsibili- 
ties than  obtaining  deposits  and  making  loans.  He  is 
expected  to  give  constant  and  vigilant  supervision  to 
every  part  of  the  business  of  his  office,  and  to  the  gen- 
eral deportment  of  his  staff.  The  fact  that  he  is  per- 
mitted by  the  head  office  to  delegate  a  certain  portion 
of  this  work  to  the  accountant  or  other  senior  officer 
does  not  relieve  bin  of  the  responsibility  for  anytliing 
that  goes  wrong. 

Except  at  the  small  offices  the  manager  is  not  ex- 
pected to  do  any  of  the  routine  work  of  entering  or  post- 
ing, but  he  has  a  good  deal  of  work  to  do  in  connection 
with  the  checking  of  the  day's  work. 

122.  The  daily  work. — A  manager  will  find  it  of  great 
advantage  to  himself  and  his  staff  to  reach  the  office  a 
little  before  nine.  Not  only  can  more  work  be  done 
between  nine  and  ten  o'clock  than  in  any  other  two 
hours  of  the  day,  but  the  manager's  punctuality  ensures 
a  like  quality  in  the  staff. 

The  first  work  of  the  day  is  to  distribute  the  mail,  after 
numbering  and  entering  all  letters  containing  enclos- 
ures in  the  letters  received  register.  The  earlier  this  is 
done,  the  sooner  the  staff  can  start  the  day's  work.  The 
next  duty  is  the  checking  of  the  previous  day's  v;ork. 
The  manager  either  individually  or  in  conjunction  with 


RECORD   AND    DIARY   OF    ROUTINE   WORK   FOR   MO 


^':^:::^jrjT!Z^^:^^>^'^^ 


Dat 


K<  ix  Initials  or  OrricEiw  Checsino  Lbdoem.  Cahh  Boc 

Suppl 


BRANTII 


R    MONTH    OF 


.191 


In  offirc,  wh.^  therr  an.  more  than  one  '-^{''".{'ll^P^.^.'In'^'f "" 
may  awist  in  rhorkinit  lA-ilm-n  othir  than  tneir  o»n. 


Cash  Bookk  and  Voucherh 


CASH 


Suppl':'    VouchorM 
-  i.\        -  Z 


HavinRs       Savinus      Ciwh 


Iniliiila  of  ( irti<«r  who  Chiik.  il 
Ti'IUt's  Cash 


Supiil'y  1    Vourhcrs 


-r 


KiMik 


Ut       I       2nd  3rd       |       Uji 

TfUer       T.II.T        Trll.-r        T.-II.t 


Initial!* 

of  T.II.T 


i  1 


DiffiriMiii' iivrr  in      I  y^^^,.  j  ,„.i^  Wound  and  Safi-  CUwd 

hlai  k,  »liort   mi  nil     < 


Tinii' 


Amount  Initial*  Two  Offlorr.      |    W(X'j|;K 


Number 
of  hours 
Wound 


FuaRE  S 


THE    BRANCH    STAFF 


137 


the  accountant  compares  carefully  all  the  entries  in  the 
Mirious  cash  books  with  their  respective  vouchers,  pay- 
ing due  regard  to  the  regularity  of  the  latter,  both  as  to 
si '••natures,  endorsements,  etc.  lie  also  compares  all 
credit  entries  with  the  various  registers  and  other  books 
of  original  entry.  The  letters  containing  enclosures  are 
then  carefully  compared  with  the  relative  entries  in  the 
hooks  to  see  that  every  item  received  on  the  previous  day 
lias  been  properly  accounted  for  and  entered.  Finally, 
the  extensions  and  additions  are  checked,  and  the  man- 
ager attests  the  correctness  of  the  work  by  placing  his 
initials  in  the  cash  book,  opposite  the  balance  to  be  car- 
ried forward.  After  comparison,  all  checks,  drafts,  and 
other  vouchers  must  be  effectually  cancelled,  so  as  to 
])reclude  their  being  used  a  second  time.  While  em- 
l)loyed  in  the  above  work  the  manager  sees  that  the  check- 
ing of  the  general  ledger,  savings  bank  and  current 
account  ledgers  is  properly  carried  on  by  the  officers  to 
\\hom  such  work  is  assigned,  and  that  all  entries  in  the 
cash  books,  discount  blotter,  etc.,  are  carefully  compared 
^^  ith  the  ledgers  mentioned.  All  checking  in  the  office 
should  be  accomplished  before  ten  o'clock  in  the  morning. 

The  manager  is  now  prepared  to  receive  and  inter- 
view customers,  and  his  desk  should  be  so  placed  that  he 
can  see  all  who  enter  the  office.  Both  the  manager  and 
the  accoiintant  should  be  constantly  on  the  alert  to  see 
that  every  customer  receives  prompt  attention.  This  is 
particularly  important  in  dealing  with  strangers — if 
they  are  desirable,  the  attention  creates  a  favorable  im- 
l)ression ;  if  they  are  not  desirable,  the  experienced  judg- 
ment of  the  manager  will  at  once  recognize  the  fact  and 
a  jiossible  risk  will  be  averted. 

During  the  day  the  manager's  time  is  fully  occupied 
with  preparing  applications  for  credit,  general  corre- 


138 


BANKING   PRACTICE 


Vm 


spo!ideiice,  and  interviews  with  customers.  Much  of  the 
manager's  time  is  frequently  wasted  by  customers,  and 
oflFenders  in  this  respect  should  be  tactfully  broken  of 
the  habit.  Every  miimte  of  the  manager's  time  costs 
money  to  the  bank— a  fact  frequently  overlooked  by 
both  the  customer  and  the  manager  himself. 

During  the  day  the  manager  will  be  called  upon  to 
sign  drafts,  head  office  returns,  and  other  documents. 
This  work  should  not  be  done  in  a  perfunctory  manner, 
but  with  a  full  realization  of  the  responsibility  which  the 
signature  entails. 

All  correspondence  of  the  office  is  under  the  immedi- 
ate supervision  of  the  manager,  and  all  letters  should 
be  signed  by  him. 

At  the  close  of  the  day  the  manager  examines  the 
teller's  cash  and  sees  it  placed  in  the  teller's  chest  and 
locked  in  the  safe,  at  the  same  time  checking  the  time- 
lock  and  certifying  to  the  examination  by  placing  his 
initials  against  the  balance  after  comparing  it  with  the 
cash  book. 

All  local  bills  and  notes,  whether  under  discount  or 
held  for  collection,  are  kept  in  the  manager's  charge. 
These  are  taken  over  by  him  and  initialed  for  in  the  re- 
spective registers  at  least  twice  each  w  eek,  and  delivered 
to  the  teller  each  morning  as  tney  mature.  In  the  smaller 
offices  the  work  of  the  accountant  is  done  by  the  man- 
ager. 

The  position  of  branch  manager  corresponds  to  that 
of  a  cashier  in  a  national  bank  in  the  United  States, 
and  the  accountant  to  that  of  assistant  cashier.  The 
staff  of  a  Canadian  bank  are  designated  generally  as 
officers  irrespective  of  rank. 

123.  The  accountant. — The  position  of  accountant  is 
a  responsible  one.    As  lieutenant  or  deputy  of  the  man- 


THE    BRANCH    STAFF 


130 


ajrer  he  is  frequently  called  upon  to  assume  charge  of 
the  office  whenever  it  may  be  necessary  for  the  man- 
ager to  be  absent,  to  which  end  he  should  be  thoroughly 
acquainted  with  the  discounts  and  general  business  of 
the  office.    A  great  part  of  an  accountant's  duties  con- 
sists in  relieving  the  manager  of  the  work   (but  not 
the  responsibility)   of  looking  after  the  routine  and 
general  supervision  of  the  office.    With  the  concurrence 
of  the  manager  he  apportions  the  work  among  the  staff, 
clearly  defining  the  duties  of  each  officer,  sees  that 
prompt  and  becoming  attention  is  given  to  the  public, 
devotes  such  direction  and  teaching  to  his  subordinates 
as  they  may  require,  and  ensures  that   all  work   is 
punctually  performed,  and  none  permitted  to  fall  into 

arrears.  j  ^  u 

The  position  of  accountant  offers  an  unlimited  field, 
not  only  for  the  acquirement  of  the  qualifications  of  a 
successful  manager,  but  also  for  the  development  of  ad- 
ministrative ability  in  the  arrangement  of  the  work  of 
the  office,  and  the  management  of  the  staff.    A  capable 
accountant  means  a  contented  staff  and  efficiency  in  the 
work;  no  one  is  overworked,  yet  no  man  has  an  idle 
moment.    The  capable  accountant  sees  that  the  entries 
in  the  teller's  books  are  so  arranged  that  each  depart- 
ment has  a  total  to  balance  to  at  the  end  of  the  day, 
and  any  error  e^..  thus  be  easily  located.    If  the  work 
is  heavy  it  is  balanced  in  batches  during  the  day,  and 
the  work  of  balancing  at  the  end  of  the  day  is  thus  re- 
duced to  a  minimum.    A  spirit  of  emulation  rapidly 
evinces  itself  in  the  staff,  night  work  is  seldom  neces- 
sary, and  everyone  takes  a  pride  in  keeping  the  work 
uj)  to  date.     (See  Chapter  XI.) 

To  obtain  these  results  may  take  a  little  time  and  pa- 
tience on  the  part  of  the  accountant,  but  when  it  is  once 


140 


BANKING   PRACTICE 


■|  * 


accomplished  he  will  have  all  the  more  time  to  devote 
to  his  other  duties. 

The  accountant  is  generally  expected  to  check  all 
statements  and  returns,  to  see  that  nothing  has  been  omit- 
ted, and  to  sign  or  :  ;itial  them  in  attestation  of  their  cor- 
rectness,  prior  to  handing  tliem  to  the  manager  for  com- 
pletion. 

The  accountant  jointly  with  the  manager  has  control 
of  the  treasury  cash  and  other  valuables  of  the  branch. 
He  is  also  responsible  for  the  safe-keeping  of  all  en- 
graved forms,  such  as  drafts,  money  orders,  and  the  like. 
124.  The  teller.— A  great  deal  of  responsibility  is 
attached  to  the  position  of  the  officer  who  has  charge  of 
the  cash,  and  known  as  teller.  His  principal  duties  are 
the  receiving  of  deposits  and  the  payment  of  checks. 
This  work  requires  great  care  in  order  to  avoid  a  loss 
to  himself  or  to  the  bank.  In  most  banks  the  tellers  are 
required  to  make  good  all  shortages  in  the  cash.  When 
cash  is  over,  however,  the  amount  is  credited  to  an  ac- 
count in  the  deposit  ledger  called  "cash  over  account." 

In  a  small  office  the  duties  of  paying  and  receiving 
teller  are  fulfilled  by  one  man ;  in  larger  offices,  however, 
the  work  is  performed  by  two  or  more  tellers,  and  a  dis- 
tinct division  is  made  between  the  work  of  receiving  and 

paying. 

The  teller  must  scrutinize  closely  all  checks  and  cash 
items  which  are  included  in  the  deposit  in  order  to  see 
that  they  are  properly  endorsed  and  in  form  as  to  dates, 
amounts,  etc.  The  total  is  then  entered  in  the  teller's 
blotter,  and  the  slip  is  handed  to  the  ledger-keeper  who 
posts  the  deposit  in  the  ledger  and  enters  it  in  the  cus- 
tomer's pass  book.     (See  Chapter  V.) 

The  only  book  kept  by  the  teller  is  the  blotter  in 
which  all  debits  and  credits  passing  through  his  hands 


THE    BBANCH    STAFF 


141 


,vc  entered.  It  has  various  columns,  in  which  *!«  «"™» 
,./r.listrib„ted  that  the  totals  can  be  nsed  by  the  d.f- 
^t  lepartments  in  proving  the  d.y^  work  A  he 
r„f  the  days  business  the  cash  is  balanced  and  t  e 
Wails  of  the  various  d-..ominations  are  entered  in  the 
',,!.«  provided  for  the  purpose  in  the  teller's  balance 

'""a  teller  should  cultivate  a  pleasing  manner  in  deaUng 
„itl>  the  public,  as  he  is  in  a  tetter  position  than  an> 
,  l,er  member  of  the  staff,  with  the  po^.ble  excep  ,on 
,    «,e  manager,  to  attract  business  to  the  bank.   A  «jriy. 
,lisobliging  teller  is  a  bad  advertisement  for  any  bank 
Vl^ ledger-keeper.-^  good  le<lger-keci«r  should 
U  accurate,  quick,  and  a  good  writer.    Acc^a^  «  the 
most  important  qualification,  as  errors  •"  P»»t'"K  "f  '" 
extending  the  balance  of  an  account  might  result  m  a 

loss  to  the  bank.  _-i:„-  «,;fVi 

A  ledger-keeper  should  he  thoroughly  familiar  w  h 

the  signatures  of  the  bank's  customers,  and  be  constantly 
ZZ  alert  to  detect  forgeries  and  other  ."egjUant,- 
When  opening  a  new  account  care  should  be  taken 
,0  record  in  the  ledger  all  the  necessary  ?«*•«?'»"• 
In  the  case  of  accounts  with  partnerships,  societies, 
c-orporations,  etc.,  both  the  manager  «"<»  1^8er-k«per 
should  see  that  the  necessary  authorization  and  other 
ilocuments  are  lodged  with  the  bank. 

Particular  care  must  be  taken,  when  "markmg  or  ac- 
cepting checks,  to  see  that  they  are  not  written  in  such 
a  Ivnv  that  they  can  subsequently  be  changed  to  a  larger 
an,ou„t.  If  there  is  any  space  left  on  either  side  of  the 
written  amount,  it  should  be  filled  m  with  a  heavy  stroke 

"^  In  or^rto  avoid  the  possibiUty  of  an  error  in  tte  bal- 
ance of  any  account,  the  ledger  should  be    proved    fre- 


%-- 


14« 


BANKING   PRACTICE 


I  f 


:    I 


If 


It 


quently  by  adding  the  debit  and  credit  coKimns  and 
entering  the  totals  lightly  in  pencil.  These  totals  should 
be  inked  in  at  the  foot  of  each  column  and  carried  for- 
ward to  the  next  page. 

In  most  banks  the  ordinary  ledger  is  balanced  twice 
each  month,  and  the  savings  bank  ledger  once  a  month. 
If  a  ledger-keeper  has  little  or  no  difficulty  in  balancing 
his  ledger  month  after  month,  it  is  usually  a  satisfactory 
proof  of  his  general  efficiency. 

A  ledger-keeper,  in  addition  to  being  quick,  neat, 
and  thorough  in  his  work,  should  be  unfailingly  polite 
and  obliging  to  customers.     (See  Chapter  V.) 

126.  The  collection  clerk. — The  collection  department 
is  considered  one  of  the  most  important  in  connection 
with  the  business  of  the  bank,  and  the  clerk  in  charge 
of  this  work  must  be  careful  and  methodical  in  his 
work,  and  constantly  on  the  alert,  to  see  that  all  the 
details  in  connection  with  each  item  passing  through 
his  hands  are  promptly  and  carefully  looked  after  ( Sec- 
tion 248). 

The  work  of  this  department  comes  particularly  in 
contact  with  other  banks  as  correspondents  and  collec- 
tion agents,  as  also  with  the  customers  and  the  public 
generally,  and  it  is  therefore  important  that  the  busi- 
ness entrusted  to  this  department  should  be  attended  to 
in  such  a  manner  as  to  be  a  credit  to  the  bank. 

Every  bill,  note,  etc.,  received  by  the  bank  for  col- 
lection, should  be  registered  and  given  a  number  imme- 
diately on  receipt.  No  unrecorded  item  should  be  placed 
in  a  bank's  safe  or  vault,  even  overnight. 

At  most  branches  of  the  bank  the  larger  part  of  the 
items  received  for  collection  come  through  the  mails 
from  other  branches  and  correspondents,  and  the  ma- 
jority of  these  are  drafts  on  local  merchants  which  re- 


THE   BRANCH    STAFF 


143 


(jiiire  to  be  presented  for  acceptance.  The  instructions 
which  accompany  these  items  must  be  noted  and  care- 
fully followed,  items  which  are  to  be  protested  for  non- 
aneptance  or  non-payment  retpiire  special  attetition,  as 
the  hank  could  be  held  responsible  for  any  loss  if  the  in- 
strictions  are  not  carried  out  to  tlie  letter. 

As  the  bank  should  not  hold  a  collection  unaccepted 
more  than  two  days  if  the  drawee  resides  in  town,  or 
over  five  days  if  he  resides  out  of  town,  it  is  necessary 
to  obtain  the  acceptance  without  delay  or  return  the  item 
with  or  without  protest,  as  the  case  may  be.  It  is,  of 
course,  in  the  interest  of  tlie  bank  as  well  as  of  the  drawer 
to  get  all  items  accepted  if  possible.  Drafts  with  docu- 
ments attached,  such  as  bills  of  lading,  also  require  spe- 
cial attention,  and  the  instructions  regarding  each  must 
l)e  carefully  observed. 

The  work  in  connection  with  drafts  issued  on  other 
branches  or  correspondents  in  payment  for  collections, 
as  well  as  with  drafts  and  money  orders  sold  to  cus- 
tomers, is  generally  performed  by  the  collection  clerk. 
Care  should  be  exercised  when  preparing  drafts  and 
money  orders.  They  should  be  written  in  clear,  unmis- 
takable characters,  especially  the  amount,  which  should 
commence  at  the  extreme  left  of  the  blank  space,  with 
a  ruled  line  immediately  after  the  last  word. 

127.  The  discount  clerk.— It  is  the  duty  of  the  dis- 
count clerk  to  look  after  the  work  in  connection  with 
all  notes  and  bills  discounted.  Each  note  and  bill  should 
first  be  initialed  by  the  manager,  and  then  passed  by 
the  latter  direct  to  the  discount  clerk,  who  should  see 
that  each  item  is  in  proper  form  as  regards  terms,  date, 
endorsement,  and  the  like,  before  entering  it  in  the 
discount  register.  The  interest  is  then  reckoned  and 
the  proceeds  credited  to  the  customer's  account  through 


144 


BANKING   PRACTICE 


^!  ,  , 


the  discount  blotter.  In  the  case  of  a  "petty  loan"  a 
voucher  is  issued  on  which  the  proceeds  may  be  drawn 
in  cash.  All  interest  computations  should  be  checked 
by  a  second  officer  to  ensure  correctness.  Exchange 
on  bills  payable  at  outside  points  must  also  be  de- 
ducted. 

The  discount  clerk  should  be  accurate,  quick,  and  neat 
in  his  work,  and  as  he  is  continually  in  touch  with  the 
public  he  should  always  l)e  courteous  in  his  dealings 
with  those  with  whom  he  conies  in  contact. 

His  is  a  most  important  department,  and  an  efficient 
discount  clerk  is  a  gootl  asset  for  the  bank,  and  of  in- 
valuable assistance  to  the  manager. 

128.  The  junior.— The  duties  of  the  junior,  as  the 
beginner  is  called,  varies  according  to  the  size  of  the 
office.  At  a  small  country  branch  he  will  have  charge 
of  the  collections,  cash  book,  supplementary  cash  book, 
outgoing  mail,  besides  various  other  duties  which  in  a 
large  office  are  performed  by  the  messenger  or  porter. 
In  a  large  office  where  there  are  several  tellers,  ledger- 
keepers,  etc.,  his  duties  may  consist  of  only  one  line  of 
work.  He  may  be  one  among  several  in  charge  of  the 
supplementary  cash  books,  and  do  nothing  else  all  day 
than  entering  up  deposits  and  checks;  or  he  may  do  simi- 
lar entry  work  in  various  other  departments. 

No  matter  what  work  is  recjuired  of  a  junior,  he  should 
do  it  willingly  and  with  a  view  to  gaining  a  reputation 
for  thoroughness.  Promotion  will  depend  upon  the 
accuracy  of  his  work  and  upon  his  general  usefulness 
to  the  bank. 

In  the  performance  of  the  routine  work  of  a  bank, 
.,  e  value  of  a  junior's  or  other  officer's  services  will  de- 
pend largely  upon  efficiency  in  the  following  respects, 
which  are  given  in  the  order  of  their  importance: 


a«l1 


THE    BRANCH    STAFF 


145 


1.  Accuracy  and  thoroughness  of  work; 

'2.  Legibility  and  appearance  of  handwriting  and 
work  generally; 

;j.  Cieneral  appearance,  address,  tactfu  id  pleasing 
manner  towards  customers; 

t.  Rapidity  in  the  performance  of  work. 

Equally  important  considerations  are  the  preserva- 
tion of  good  health,  irreproachably  good  habits,  and 
economy  in  personal  expenditure. 


C-Vlil— 10 


CHAPTER  IV 


BRANCH  BOOKS  AND  RECORDS 


129.  Bank  accounting.— The  tendency  of  modern 
accounting  is  to  adapt  the  hooks  to  a  business,  rather 
than  tiie  business  to  the  h(K)ks,  and  this  practice  is  par- 
ticularly noticeable  in  bank  bookkeeping.  Systems  and 
devices  may  differ  among  banks,  and  even  between 
branches  of  the  same  bank,  but  the  basic  principles  are 
the  same.  Once  a  clear  understanding  of  bank  book- 
keeping in  general  is  obtained,  there  will  be  found  little 
or  no  difficulty  in  mastering  any  of  the  methods  or  sys- 
tems in  use  by  Canadian  banks. 

To  grasp  thoroughly  all  the  underlying  principles  of 
bank  accounting,  it  is  necessary  to  bear  in  mind  that 
practically  everything  handled  by  a  bank,  in  the  ordinary 
course  of  its  business,  is  either  money  itself,  or  a  written 
claim  or  right  to  money.  Consecjuently  the  cash  book 
in  a  bank  is  the  principal  book,  and  through  its  pages 
must  pass  a  reconl  of  every  transaction  made  by  the 
bank,  either  in  detail  or  as  a  total  from  a  supplementary 
book.  Thus  the  cash  book  gives  a  bird's-eye  view  each 
day  of  all  the  work  of  the  bank.  Some  banks  still  use, 
in  addition  to  the  cash  book,  a  modified  form  of  the  old- 
fashioned  journal,  but  it  is  i)referable  to  make  the  cash 
book  the  only  posting  medium  of  the  general  ledger. 

It  would  be  quite  ])ossible  for  a  newly-opened  branch 
to  conduct  its  business  for  the  first  six  months  or  so  with 
the  aid  of  a  cash  book  and  a  ledger,  which  would  serve 

146 


BRANCH    B(H)KS    AND    HECORDS 


147 


I  lor  all  accounts.    A  collection  register  would,  however, 

I  soon  he  necessary. 

As  the  business  grew  it  would  be  found  convenient  to 

lliave  a  special  ledger  for  individual  accounts,  with  the 
control  or  key  account  carried  in  the  original  ledger,  and 
to  have  the  cliecks  and  deposits  entered  in  a  supplemen- 
tary cash  book,  with  only  the  totals  entered  in  the  general 
casii  hook.  Similarly,  it  would  he  found  necessary  in 
time  to  open  up  a  discount  register  and  a  liability  ledger 

[to  look  after  the  increased  nunil)er  of  loans. 

i\s  the  volume  of  business  increases,  the  deposit  ledger 

I  IS  capable  of  being  indefinitely  subdivided,  either  alpha- 
licticailv  or  numerically,     (ienerallv,  the  ordinary  de- 
posit  ledger  is  divided  alphabetically  and  the  savings 
bank  ledger  mmierically. 
From  the  above  it  will  be  noticed  that  bank  bookkeep- 

linjjf.  although  based  primarily  on  the  cash  book  and 

lledj^'cr.  is  susceptible  of  indefinite  expansion  in  any  direc- 

Ition  to  meet  increased  volume  of  business  or  other  local 

I  exigencies. 

130.  Books  of  a  hratich.— The  hooks  in  use  at  a  fairly 
large  office  generally  include  the  following: 

1.     Books  of  Original  Entry 

Figs.  9-10,  33.  Cash  Book. 

11.  Cnsh  Book,  supplctnentary. 

12.  Discount  Kc^i-stcr. 

13.  Discount  Blotter. 

14.  Discount  Diary,  local  bills. 
15-16.  Discount  Diary,  remitted  bills. 
17-18.  Draft  Register. 
19-20.  Checks  Remitted  Register. 

21.  Sight  Item  Register. 

22.  Remittance  Book  ("Red"  hook). 
28.     Branch  Clearings  Statement. 


i 


y 


148 


BANKING    rRACTIC'E 


2. 

J26. 
27. 
28. 
29. 
30. 

3. 

Figs.  31-33. 
3+. 
3.5. 
36. 
37. 


Teller's  Books 

'IVIlcr's  Hlotlcr. 

Teller's  Cash  Items  Sheet. 

Teller's  C  ush  Statement. 

Money  Parcels  Received. 

Money  Parcels  Despatched. 

Books  of  Summary 

(icneral  Ledger. 

Deposit  Ledger. 

Savings  Deposit  Ledger. 

Liability  Ledger. 

Blue  Books  (Trade  Paper). 


4.     Fidue'mry  Books 
Fig.  38.     Collettion  Register. 
Collection  Diary. 
39.     Collateral  Register. 

6.     Statistical  Books,  etc. 
General  Statement  Book. 
Financial  Statement  Book. 
Fig.  40.      Letters  Received  Register. 

Postage  or  Letters  Despatched  Book. 
Past  Due  Bill  Register. 
Warehouse  Receipt  or  Produce  Book. 
Pro  Forma  Stationery  Book. 
Register  «)f  Powers  of  Attorney. 
Register  «)f  Waivers,  Etc. 

41.  Overdraft  Register. 
Ex])ense  Book. 

42.  Discrepancy  Book. 

43.  Treasury  Bo»)k. 

This  list  may  appear  formidable  but  it  is  intentionally  ^^ 
comprehensive.     A  smaller  branch  would  require  only 
half  this  number;  the  fewer  books  used  in  an  office  thej 


« 


BRANCH    BOOKS    AND   RECORDS 


149 


better.  New  books  or  sub-divisions  of  books  should  be 
iiitrwluced  only  when  the  work  on  the  original  book  be- 
comes congested.  A  ledger,  for  instance,  should  be  sub- 
ili\i(led  only  when  the  posting  and  references  become 
too  heavy  for  one  clerk  to  do,  and  when,  in  consequence, 
the  work  of  the  office  is  delayed.  Method,  simplicity, 
and  concentration  are  the  foundations  of  an  efficiently 
managed  office. 

Hooks  should  be  uniform  in  size  as  far  as  possible; 
thickness  and  weight  should  be  avoided.  Two  or  three 
standard  sizes  should  be  established  and  complied  with. 
rniformity  in  size  and  position  of  post  holes  is  particu- 
larly advantageous  in  the  loose-leaf  system,  as  the  bind- 
ers are  then  not  only  interchangeable,  but  one  binder  can 
be  used  for  several  different  forms. 
I  Attention  should  be  paid  to  the  ruling,  with  a  view  to 
uniformity.  One  inch  and  a  quarter  is  ample  width  for 
the  average  money  column,  with  a  hair  line  dividing  the 
thousands — allow  five-sixteenths  of  an  inch  for  the  cents 
and.  say,  seven-sixteenths  for  the  thousands.  One-half 
to  three-quarters  of  an  inch  is  sufficient  for  discount, 
exchange,  and  date  columns,  etc.  As  regards  the  width 
between  the  horizontal  lines,  one-quarter  inch  is  a  good 
a\  erage.  In  books  where  the  entries  are  extended  across 
a  number  of  columns,  every  fifth  horizontal  line  should 
be  of  u  color  different  from  the  regular  ruling,  to  serve 
as  a  guide  line.  Books  or  forms  intended  for  use  with 
an  adding  machine,  if  ruled,  should  be  spaced  according 
to  the  mechanical  spacing  of  the  machines  used. 

In  the  sample  forms  given  in  this  chapter  no  attempt 
is  made  to  preserve  the  correct  proportion  of  the  various 
polmmis:  to  do  so  would  occupy  too  much  space.  These 
i  forms  have  no  particular  claim  to  merit  except  that  they 
ba\  e  Ijcen  in  satisfactory  use  for  years  in  different  banks. 


150 


BANKING    PRACTICE 


t 


They  are  general  rather  than  specific,  and  will,  it  is| 
hoped,  be  suggestive  as  well  as  directly  useful. 

131.  Loose-leaf  accounting. — The  vast  increase  in  the  I 
number  and  volume  of  commercial  transactions  during 
the  past  twenty  years  has  made  the  use  of  loose-leaf 
ledgers  and  other  books  a  practical  necessity  in  modern 
accounting,  and  in  Canadian  banks,  particularly,  the 
system  has  been  in  successful  operation  for  many  years. 
The  i)rincipal  objection  urged  against  loose-leaf  ledg- 
ers— the  question  of  their  validity  in  a  court  of  law — ap- 
pears to  have  died  a  natural  death.  The  courts  rule  so 
plainly,  and  tlie  logic  is  so  clear,  that  it  is  the  original 
entry  that  counts,  and  not  the  assembly  of  entries  in 
the  ledger,  that  it  is  now  generally  conceded  that  the 
loose-leaf  ledger  is  just  as  acceptable  as  evidence  in  a ' 
court  as  a  bound  ledger.  In  fact,  with  the  precautions  | 
observed  by  the  banks  in  their  use  of  loose-leaf  books, 
the  evidence  might  be  considered  even  more  competent. 
The  following  rules  are  generally  observed : 

1.  The  keys  of  all  loose-leaf  ledgers  and  transfer  bind- 
ers are  kept  in  the  custody  of  the  manager  or  of  the 

accountant  or  other  officer  specially  authorized,  by 
whom  blank  sheets  are  inserted  as  required,  and  the 
used  sheets  removed  and  filed  in  the  transfer  binder. 

2.  After  removing  the  sheets,  the  officer  who  has  ciis-l 
tody  of  the  key  must  place  a  paper  seal  bearing  his 
signature  in  the  sealing  device  on  the  front  of  the' 
ledger,  and,  when  opening  the  book  again,  must  «t- 
isfy  himself  that  his  last  seal  has  not  been  tampered 
with. 

8.  A  separate  sheet  must  be  used  for  each  account,  and : 
each  sheet  must  be  signed  in  the  upper  right-hand 
corner  by  the  manager  or  accountant  when  the  first 


BRANCH    BOOKS   AND   RECORDS 


151 


entry  is  made.  The  officer  who  signs  the  sheet  must 
see  that  the  account  is  properly  indexed. 
4.  A  few  blank  sheets  may  be  locked  in  the  current 
ledger  for  emergency  use,  but  all  others  must  be  kept 
under  lock  in  the  custody  of  the  officer  who  holds  the 
key  of  the  ledger. 

Hound  books  have  not  prevented  manipulation  and 
fraud,  and  the  above  precautions  combined  with  the  com- 
j)ieliensive  checking  system  of  a  bank  should  practically 
tliniiMate  the  danger  of  fraudulent  substitution  of  pages. 
1 1'  a  man  is  determined  to  be  dishonest  there  are  easier 
and  less  evident  methods  of  defrauding  than  by  switch- 
ing ledger  leaves. 

132.  Adding  machines. — The  adding  machine  has  be- 
come an  indispensable  adjunct  of  the  modern  bank,  but 
like  all  good  things  its  usefulness  is  frequently  impaired 
hy  foolish  and  improper  application.  Speaking  gen- 
erally, the  use  of  the  adding  machine  should  be  restricted 
to  original  listing  entirely,  and  on  no  account  should  a 
t  k  rk  he  allowed  to  use  the  adding  machine  to  take  down 
and  add  up  a  column  of  figures  already  listed,  except  for 
tlitc'kiiig  purposes  only. 

Correct  addition  of  figures  is  a  very  necessary  qualifi- 
cation for  a  bank  clerk,  and  for  his  own  sake  he  should 
not  allow  himself  to  get  out  of  practice  by  depending 
too  much  on  mechanical  aid.  The  bank  is  entitled  to 
consideration,  too,  as  it  is  a  sheer  waste  of  valuable  time 
to  write  a  column  of  figures  and  then  relist  them  on  the 
machine.  The  victims  of  this  bad  habit  also  expend  a 
M(»o(l  deal  of  time  and  energy  in  hunting  or  waiting  for 
the  machine. 

Sjjecial  forms  for  use  with  the  adding  machine  should 
l>f  provided  wliere  llie  volume  of  items  warrants  it,  but 


7* 


152 


BANKING   PRACTICE 


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otherwise  the  books  should  be  entered  up  and  added 
in  the  ordinary  way.  This  rule  should  be  strictly  en- 
forced. 

133.  The  cash  hook. — This  ImjoIc  contains  a  record  of 
all  the  voucliers  and  entries  representing  the  transac- 
tions of  each  day.  Theoretically,  the  particulars  of  every 
item  in  the  cash  book  should  be  entered  in  detail,  but 
owing  to  the  wide  extension  of  banking  facilities  and  the 
constantly  increasing  volume  of  checks  and  other  entries, 
it  has  been  found  necessary  to  use  supplementary  books 
for  recording  particulars  of  any  class  of  items  whose 
volume  is  sufficient  to  warrant  a  separate  book — only  the 
day's  total  being  carried  into  the  general  cash  book.  The 
majority  of  entries,  especially  in  a  large  office,  are  there- 
fore in  the  form  of  totals,  and  very  few  detailed  entries 
have  to  be  made;  but  all  entries,  when  made,  should  be 
definite  as  to  source  and  sufficiently  self-explanatory  to 
be  understood  by  anyone  at  any  time — ten  years  after  if 
necessary. 

In  the  larger  offices,  the  officers  in  charge  of  the  dif- 
ferent departments  after  balancing  their  books  hand  to 
the  cash-book  clerk  the  totals  in  the  form  of  a  signed 
memorandum,  and  even  in  the  smaller  offices  it  is  advis- 
able to  have  the  clerks  entering  up  the  various  supple- 
mentary books  give  a  similar  memorandum  of  their  to- 
tals. This  limits  the  responsibility  and  adds  to  the  effi- 
ciency of  the  staff. 

There  is  a  tendency  in  many  offices  to  throw  the  whole 
burden  of  balancing  on  the  shoulders  of  the  cash-book 
clerk.  This  is  palpably  unfair,  as  much  of  his  time  is 
taken  up  in  looking  for  the  errors  of  others.  Every  clerk 
should  be  made  responsible  for  the  correctness  of  liis  own 
figures,  and  should  not  leave  the  office  without  the  per- 
mission of  the  accountant  until  the  cash  book  is  balanced. 


BRANCH    BOOKS   AND   RECORDS 


1A8 


In  u  well-systematized  office  where  the  "block"  or 
hatih"  method'  is  used,  this  works  little  or  no  hardship 
on  anyone,  and  certainly  adds  to  the  efficiency  and  ac- 
(iiraiy  of  the  staff.  In  some  offices  over  thirty  per  cent 
111"  the  time  is  occupied  in  looking  for  errors. 

Debit  and  credit  entries  for  the  cash  book,  other  than 
tilt'  totals  referred  to  above,  are  represented  by  vouchers 
giving  necessary  particulars,  signed  by  the  manager, 
aiiountant,  or  other  authorized  officer,  and  it  should  be 
an  imperative  rule  that  any  slip,  which  does  not  contain 
surtieient  particulars  or  which  lacks  the  necessary  signa- 
ture, should  be  refused  by  the  cash-book  clerk  and 
lelerred  back  to  the  teller  for  completion.  In  order  to 
laeilitate  the  sorting  and  checking  of  these  vouchers, 
distinctive  colored  paper  or  printing  should  be  used;  for 
instance,  yellow  debit  slips  and  white  credit  slips. 

1 1  should  be  constantly  borne  in  mind  that  as  the  cash 
l)()()k  and  its  supplementary  books  are  recognized  in  a 
court  of  law  as  the  books  of  original  entry,  faulty  or 
meagre  particulars  might  cause  serious  trouble.  Ver- 
bal explanation,  even  if  available,  would  not  be  admitted. 
Kxaniine  a  bank  cash  book  of  twenty  or  thirty  years  ago: 
tJK  re  could  be  no  better  object  lesson  of  what  a  cash  book 
sliduld  be.  Copper-plate  writing  and  ample  particulars 
are  eharacteristic. 

r.n.  Writing  up  the  cash  boofc.— Many  labor-saving 
and  ingenious  rulings  are  to  be  found  among  the  books 
of  hanks,  and  improvements  are  constantly  being  devised 
and  adopted.  The  most  essential  book,  however,  the  cash 
Ixiok.  remains  practically  unchanged,  and  is  simply  an 
ordinary  commercial  cash  book  with  two  or  tliree  money 
coliinins,  a  space  for  date  and  particulars,  and  with  no 
l)rinte(l   headings.     The  columnar  cash   book   is  not 

'Sw  Chapter  XI.  _  _ 


7/ 


154 


BANKING    PRACTICE 


1 


adapted  tu  bank  work,  and  it  has  never  found  favor, 
The  form  in  general  use,  even  in  large  offices,  is  shown! 
in  Figure  0. 

As  a  rule  it  is  found  convenient  to  sort  out  the  differ- 
ent vouchers  into  debits  and  credits,  and  arrange  andj 
enter  them  in  the  order  that  the  accounts  appear  in  tlit 
general  ledger,  the  credit  vouchers  being  entered  on  the  | 
left  or  debit  side  of  the  cash  book,  and  debit  vouchers  on 
the  right  or  credit  side,  the  headings  of  the  various  ac- 
counts on  each  side  being  in  line  with  each  other. 

The  headings  are  generally  raised  during  the  day, 
spaced  according  to  probable  requirements,  and  the| 
vouchers  entered  as  they  accumulate,  leaving  the  totals 
of  the  supplementary  books  as  the  final  entries.  Where 
there  is  only  one  amount  for  the  heading  it  is  entered  | 
in  the  outer  or  right-hand  column,  and  where  there  are 
several  amounts  they  are  entered  in  the  left  or  inner  col- 
innn  and  the  total  subsequently  extended  into  the  outer. 
It  will  be  found  advantageous  to  strike  a  balance  before 
extending  the  sub-totals,  that  is.  by  adding  up  the  four 
cohunns  in  pencil  as,  in  case  of  error  or  omission,  no 
extension  will  have  to  be  altered. 

The  practice  of  writing  up  the  cash  book  and  guessing 
at  the  required  space  before  all  the  entries  are  on  hand, 
naturally  creates  many  blank  spaces,  and  is  a  departure 
from  the  rules  of  formal  bookkeeping  which  requires  that 
every  line  should  be  written  on  in  seijuence.  Another  in- 
formality found  in  large  offices  is  the  use  of  different  cash 
books  on  alternate  days.  This  destroys  the  chronological 
sequence  of  the  entries.  There  is  probably  no  serious  ob- 
jection to  either  custom,  but  the  advantage  gained  is 
more  apparent  than  real,  and  the  practice  can  be  easily 
avoided  by  a  slight  adjustment  of  method.  The  alter- 
nate cash  book-is  unnecessary  except  in  very  large  offices; 


BRANCH    BOOKS    AND    RECORDS 


150 


(.Iherwise  it  means  that  the  cash  book  is  overloaded  with 
accounts  and  entries  which  should  be  dealt  with  through 
supplementary  books. 

135.  Sherbrooke  cash  book. — A  good  form  of  cash  book 
is  shown  in  Figure  10.  The  headings  require  to  be  writ- 
ten only  once,  the  credit  entries  with  particulars  being 
entered  on  the  left  and  the  debit  entries  on  the  right. 
Three  fine  hair  lines  divide  the  particular  column,  the 
center  line  serving  as  a  division  between  the  debit  and 
the  credit  vouchers,  while  the  outer  lines  can  be  used  as 
writing  guides,  thus  adding  to  the  uniformity  and  com- 
pactness of  the  entries.  The  procedure  of  entering  and 
balancing  is  the  same  as  in  Figure  9. 

136.  Supplementary  cash  book. — In  this  book  are  en- 
tered all  the  deposit  slips,  checks,  and  other  vouchers 
|)crtaining  to  the  ordinary  deposit  and  savings  bank 
ledgers.  A  page  of  the  form  in  general  use  is  shown  in 
Figure  11.  The  ruling  is  simple,  requiring  no  printed 
headings,  and  consists  of  columns  for  folio,  names  of 
customers  and  amount  of  vouchers — two  sets  of  col- 
umns to  a  page.  Two  pages  will  easily  contain  a  day's 
entries  for  a  small  branch,  the  first  or  left-ha!id  column 
being  used  for  deposits  and  the  remaining  three  for 
checks,  the  latter  being  much  more  numerous.  The  sav- 
ings deposits  and  checks,  l)eing  comparatively  few  in 
number,  are  entered  at  the  end  of  the  day  under  their 
own  headings  at  the  foot  of  the  ordinary  checks  and  de- 
posits respectively,  though  in  some  small  branches  they 
are  entered  in  the  general  cash  book. 

In  offices  where  it  is  found  necessary  to  split  up  the 
deposit  ledger  into  two  or  more  alphabetical  divisions, 
Ji  special  "supplementary"  is  devoted  to  each  division 
including  the  savings  bank  ledger.  It  is  not  necessary 
to  open  up  an  account  in  the  general  ledger  for  each  di- 


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BRANCH    BOOKS    AND    RECORDS 


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vision  of  the  deposit  ledgers.  The  total  from  the  sev- 
eral divisions  should  be  combined  in  the  detailed  column 
of  the  gcioral  cash  book  and  only  the  total  extended  and 
posted  in  the  general  ledger  to  ordinary  deposits.  The 
individual  ledger-keepers  can  easily  keep  a  controlling 
balance  in  the  back  of  their  own  ledgers,  and  the  com- 
bined balances,  so  obtained,  will  agree  with  the  amount 
in  the  general  ledger  at  any  time.  Some  banks,  how- 
ever, prefer  to  keep  a  separate  account  in  the  general 
ledger  for  each  division  of  the  deposit  ledgers. 

If  the  savings  ledger  contains  a  large  number  of  ac- 
counts, it  will  be  found  of  great  advantage  to  split  it  up 
into  several  sections  or  blocks  of  accounts,  as  this  greatly 
facilitates  the  location  of  errors  when  balancing.  A  spe- 
cial form  of  supplementary  cash  book  should  be  used 
with  a  money  column  for  each  block  of  accounts. 

In  the  cas(  of  a  current  account  which  has  an  unusual 
number  of  checks  at  a  certain  period  of  the  month  or 
year — for  instance,  pay  roll  or  dividend  checks — it  is  per- 
missible to  detail  a  day's  checks  once,  either  in  the  supple- 
mentary cash  book  or  ledger,  and  enter  the  total  only  in 
the  other  book  with  a  reference. 

In  the  larger  offices  of  some  of  the  banks,  where  the 
volume  of  checks  is  unusually  heavy,  a  loose-leaf  form  of 
supplementary  cash  book  is  used  in  connection  with  the 
adding  machine,  the  names  being  typewritten  in  after- 
wards. Where  this  form  is  adopted,  care  should  be  taken 
to  see  that  the  sheets  are  consecutively  numbered  and 
filed,  and  that  each  sheet  is  signed  by  the  two  checking 
officers. 

137.  Discount  register. — In  this  book,  as  its  name  im- 
plies, are  entered  all  the  notes  and  bills  discounted  by  a 
branch.  The  book  is  ruled  so  as  to  provide  space  for  a 
full  description  of  every  item,  and  the  notes  are  entered 


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BRANCH    BOOKS    AND    RECORDS 


159 


and  numbered  consecutively.  Two  or  more  lines  can  be 
used  where  a  note  has  numerous  obligants,  or  when  the 
description  of  the  security  is  lengthy.  A  form  in  com- 
mon use  is  shown  in  Figure  12.  The  headings  are  self- 
explanatory  with  the  exception  of  perhaps  the  last  two, 
loans  and  trade  bills. 

Loans  comprise  all  the  advances  made  to  a  borrower 
oil  his  own  name,  and  consist  principally  of  the  following 
classes: 

(a)  Advances  made  on  the  name  of  the  borrower 

alone ; 

(b)  Advances  secured  by  one  or  more  endorsers; 

(c)  Advances    secured    by    produce,    stocks    and 
bonds,  notes,  and  other  collateral  securities. 

Trade  bills  represent  settlements  for  actual  goods  sold, 
and  are  only  offered  by  the  party  who  has  disposed  of  the 
goods.    They  may  consist  of  either  drafts  or  notes. 

The  last,  or  remark  column,  is  used  to  denote  the  domi- 
cile of  a  trade  bill  when  it  is  payable  at  an  outside  point. 
It  is  also  used  for  any  special  memorandum  regarding 
renewals,  and  the  like.  Some  banks  have  an  additional 
column  for  proceeds  in  their  discount  register. 

As  already  stated,  all  notes  and  bills  are  entered  and 
numbered  consecutively.  The  loans  and  local  trade  bills 
are  then  entered  in  the  diary  and  taken  over,  checked  and 
initialed  for  by  the  manager  daily,  or  at  least  twice  a 
week.  The  other  trade  bills  are  entered  in  the  trade  bills 
remitted  diary  and  initialed  for  by  the  mailing  officer. 

138.  Discount  blotter. — This  book  is  a  valuable  ad- 
junct to  the  discount  register  and  an  excellent  form  is 
shown  in  Figure  13.  In  this  book  are  entered  the  net 
total  proceeds  of  the  discounts  to  be  credited  to  the  vari- 
ous customers,  also  the  amount  of  interest  and  exchange 


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BRANCH    BOOKS    AND   RECORDS 


161 


collected.  If  more  than  one  deposit  ledger  is  used,  a  col- 
unm  is  provided  for  each  ledger.  These  entries  are  made 
fiom  the  discount  deposit  slips  or  lists  which  are  then 
passed  on  to  the  ledger-keeper  who  posts  the  net  proceeds 
to  the  credit  of  the  various  customers  in  the  ledger,  mark- 
ing the  abbreviation  "disct"  opposite  each  entry. 

In  the  case  of  casual  or  transient  notes  discounted  for 
customers  who  have  no  deposit  accounts,  a  special  form 
of  receipt  is  used  which,  when  signed  by  the  obligant,  is 
cashed  by  the  teller  and  charged  to  an  account  called 
"petty  discounts"  in  the  deposit  ledger.  The  offsetting 
credits  are  entered  in  detail  in  the  last  colimin  of  the 
blotter,  extended  at  the  end  of  the  day  into  the  ledger 
column  and  posted  in  one  amount  to  the  account. 

When  the  day's  work  is  balanced,  the  interest,  ex- 
ciiange,  and  ledger  columns  will  agree  with  the  total 
of  the  loans  and  trade  bills  in  the  discount  register. 
The  total  for  the  deposit  ledger  is  included  in  the  total 
of  the  supplementary  cash  book  for  the  day,  and  the 
balancing  entries  are  passed  through  the  general  cash 
book. 

Some  banks  make  a  practice  of  passing  these  entries 
through  the  cash  book  only  once  a  week,  crediting,  daily, 
however,  the  customers  in  the  deposit  ledger.  The 
former  method,  however,  is  to  be  recommended,  and  is 
decidedly  better  accounting.  Theoretically  and  practi- 
cally, all  the  books  of  a  bank  should  be  in  balance  with 
each  other  daily,  and  thus  the  true  position  of  the  bank 
be  ascertainable  at  the  end  of  each  day.  This  is  not  the 
case  unless  all  the  entries  are  completed  daily. 

The  entries  in  the  blotter  are  called  off  with  the  de- 
posit ledger  daily. 

The  discount  and  exchange  columns  in  the  blotter  are 
not  only  useful  for  recording  the  total  amount  of  inter- 

C-VIII— 1! 


162 


BANKING    PRACTICE 


est  and  exchange  paid  by  customers,  but  are  also  of 
assistance  in  balancing  the  discount  register. 

139.  Discount  diary. — Figure  14  shows  a  useful  form 
of  diary  for  loans  and  local  trade  bills  maturing,  a  page 
or  part  of  a  page  being  given  to  each  day  of  the  year. 
As  each  day's  bills  mature  the  notes  are  taken  over  and 
initialed  for  by  the  teller,  a  line  being  drawn  across  the 
money  columns,  and  the  loans  and  trade  bills  for  the  day 
totaled.  At  the  end  of  the  day  the  unpaid  items  are  ex- 
tended into  the  past  due  column  for  debit  to  past  due 
bills  account,  and  the  entries  passed  through  the  teller's 
blotter,  whose  "Notes  paid"  column  should  balance  with 
the  total  of  the  credits  to  loans  and  trade  bills. 

Any  notes  paid  before  maturity  are  marked  off  the 
diary  on  the  day  due,  and  entered  below  the  dividing  line 
of  the  day's  notes  and  added  to  total.  Similarly  any  past 
due  bills  should  be  marked  oflF  and  entered  in  the  column 
provided,  all  entries  below  the  line  in  this  column  being 
considered  credits. 

The  column  for  interest  can  be  used  for  a  record  of 
any  interest  collected,  which  is  not  entered  in  the  register, 
such  as  interest  on  past  dues,  demand  notes,  etc.  The 
diary  sheet  of  the  day  \nll  therefore  afford  a  complete 
record  of  all  payments  made  to  the  discount  department, 

140.  Trade  bills  remitted  diary. — Only  in  the  very 
large  offices  is  it  necessary  to  have  a  separate  book  for 
this  diary.  In  the  ordinary  branch,  the  ruling  given  in 
Figure  15  appears  at  the  foot  of  the  discount  diary.  At 
the  end  of  each  day  the  total  is  credited  to  trade  bills 
remitted  and  debited  to  cash  items  account,  there  to  await 
the  relative  remittances,  credits,  etc.,  when  the  items  are 
duly  marked  off  as  either  paid  or  returned. 

Considerable  space  is  wasted  in  connection  with  this 
daily  diary,  and  a  weekly  diary,  as  shown  in  Figure  16, 


t: 


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164 


BANKING    PRACTICE 


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has  been  used  to  advantage.  Four  sheets  to  the  month 
are  used,  covering  1st  to  8th,  9th  to  15th,  16th  to  23(1, 
and  24th  to  the  end  of  the  month,  and  are  filed  in  their 
chronological  order  in  the  discoimt  diary,  a  different  col- 
ored paper  being  used  to  distinguish  them.  The  bills  are 
entered  in  consecutive  order  according  to  maturity  on 
these  weekly  sheets.  On  the  second  day  of  each  week, 
say  on  August  2,  for  the  week  of  August  1  to  8, 
the  total  for  the  week  is  credited  to  trade  bills  and  debited 
to  cash  items  account,  and  the  sheet  handed  to  the  cash- 
book  man  to  be  marked  off  as  the  items  are  accounted 
for. 

141.  Drafts  register. — The  first  form  given  in  Figure 
1 7  is  for  drafts  drawn  on  foreign  correspondents.  These 
generally  have  to  be  covered  by  remittances  or  credits  to 
another  branch  or  correspondent,  and  great  care  should 
be  taken  to  see  that  the  draft  is  made  out  properly  and 
signed,  advised,  and  remitted  for  correctly. 

Figure  18  is  the  register  for  drafts  drawn  on  other 
branches.  The  total  for  the  day  is  credited  to  an  account 
in  the  general  ledger  called  draft  account.  After  pay- 
ment the  draft  is  returned  by  the  drawee  branch  at  debit, 
is  marked  off  with  the  dating  stamp,  listed  with  other 
paid  drafts  in  the  right-hand  column,  and  at  the  end  of 
the  day  this  total  is  debited  to  the  draft  account.  The 
items  unmarked  at  any  time  ^ill  be  outstanding,  and 
their  total  will  balance  with  the  draft  account. 

Remittances  to  other  banks  for  collections,  and  the 
like,  are  made  on  a  special  form  called  a  settlement  check, 
which  is  payable  only  to  a  chartered  bank.  No  advice 
is  necessary  for  these  drafts.  All  other  drafts,  with  the 
exception  of  small  ones  imder  stipulated  amounts,  say 
$200,  should  be  advised  to  the  paying  branch.  The  offi- 
cers signing  drafts  should  initial  the  register  and  be  re- 


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iPI^Vt 


160 


BANKING    PRACTICE 


siK)iisible  for  the  correctness  of  the  entries  and  the  due 
advice  of  the  drafts.  Two  or  more  columns  can  be  used 
in  this  i-egister  if  necessary.  Settlement  checks,  for  in- 
stance, or  money  orders,  could  be  given  a  special  column, 
if  desired. 

142.  Check  lists.— AW  debits  between  branches,  in- 
cluding checks,  drafts  and  money  orders  paid,  and  the 
like,  are  listed  on  a  special  form  called  a  check  list,  and 
debited  in  one  total  to  branch  clearings  account  and  the 
list  forwarded  direct.  The  receiving  branch  gives  credit 
on  the  branch  clearings  statement  immediately  on  receipt. 
Even  if  an  item  has  to  be  returned  or  there  is  an  error 
in  the  addition  of  a  list,  the  amount  as  shown  must  be 
credited  exactly,  and  the  difference  adjusted  on  "At 
Credit"  advice  or  a  return  check  list,  as  the  case  may  be. 
Check  lists  are  of  different  forms  and  sizes,  but  are  in- 
variably in  duplicate,  the  carbon  copy  being  retained  as 
a  record.  In  the  larger  branches  the  lists  are  on  loose 
sheets  of  one,  two,  or  three  lists  each,  for  use  with  the 
typewriter  or  adding  machine,  the  carbon  copies  being 
filed  in  a  binder  for  reference.  Figure  19  is  a  common 
form. 

Many  banks  follow  the  American  custom  of  omitting 
the  column  for  the  maker's  name.  This  makes  a  more 
compact  form,  and  as  many  check  signatures  are  unread- 
able not  much  is  lost  to  the  record.  In  case  of  loss  in 
transit  the  maker's  name  can  be  obtained  from  the  cus- 
tomer. In  the  smaller  branches  the  lists  are  in  bound 
form,  generally  two  large  and  four  small  lists  to  a  page, 
Figure  20.  At  the  end  of  the  day  all  lists  for  other 
branche.«f  are  debited  in  the  branch  clearings  statement, 
and  only  in  case  of  loss  or  delay  in  transit  will  the  copies 
be  referred  to. 

Check  lists  sent  to  correspondents  are  entered  and  filed 


(UEDIT 

THE  CANADIAN  BANK 

All  itFUiN  nurknl  X  and  Ihii.tr  under 
Wire  Nun-l'nymcnt  of  iteiiM  $AUO  or 

Uttle     To 

Furni  01  D 
OF  COMMERCE 
Qti:. 

$10  no  nrotrat. 
over  unlewt  utberwUe  aUted. 

.    1 

1 
Maker 

-  ■    ■ —   ■  \ 
Patch 

i 

Emm>rbcr 

Amoi-nt 

1 

FlOURE   19 

CHECK  LIST 


WHEX  rREDITINO  THESE  ITEMS  OIVE   DATE               0. 

K.  b»T 

THE  CANADIAN  BANK  OP  COMMERCE 

191 



WE  EMCLOBE  FOR  CREDIT  OR  REMITTANCE  ITEMS  AS  USTED  BEU>W: 

t 

Figure  20 
CHECK  LIST 

167 


168 


BANKING    PRACTICE 


similarly,  with  the  exception  that  they  are  d^'.ited  to  the 
head  office  in  the  branch  clearings  statement. 

143.  Cash  items.— AW  debits  originating  at  a  branch 
against  other  branches,  with  the  exception  of  check  lists, 
are  debited  to  an  account  in  the  general  ledger  called 
"cash  items"  account  or  "short  date  draft"  account. 
These  debits  may  consist  of  the  following: 

(a)  Demand  and  sight  drafts  received  from  cus- 
tomers as  cash,  the  currency  of  which  is  not 
likely  to  exceed  one  week ; 

(b)  Coupons  and  other  items  requiring  special  ad- 
vice or  attention ; 

(c)  Remitted  discounts  as  debited  each  day  from 
the  diary.  These  include  bills  held  by  corre- 
spondents as  well  as  by  branches. 

This  account  should  be  drawn  off  weekly  and  balanced 
-vith  the  general  ledger.  Any  item  outstanding  an  un- 
due length  of  time  should  be  promptly  inquired  about 
or  "fated,"  to  use  an  office  term. 

Figure  21  is  a  common  form,  combining  a  record  and 
a  letter,  bound  six  or  eight  to  a  page,  a  carbon  copy  being 
retained  as  the  record.  In  writing  the  entries,  care 
should  be  taken  to  record  full  instructions  as  to  protest, 
and  the  like.  The  items  entered  for  the  day  can  either 
be  totaled  on  the  carbon  copy  leaf  or  a  machine  list 
made  and  pasted  in  the  book,  only  the  total  being  entered 
in  the  cash  book.  The  maturing  discounts  are  of  course 
not  entered  in  this  book  except  as  part  of  the  machine 
list  referred  to.  The  items  as  paid  are  marked  off,  and 
as  each  page  is  completed,  the  right-hand  top  comer 
can  be  torn  off  at  the  ruled  line.  In  this  way  long  out- 
standing items  are  easily  watched.    A  rubber  date  stamp 


BRANCH    BOOKS  AND    RECORDS 


169 


should  be  used  to  mark  off  the  items  as  either  "paid"  or 
"returned." 

Originally,  check  lists  were  debited  to  cash  items  ac- 
count until  due  advice  of  payment  was  received  on  "At 
credit"  advice.  The  best  practice  now  is  to  debit  the 
lists  direct  to  branch  clearings  account.  No  item  is  more 
promptly  responded  to  than  a  check  list,  and  much  time 
and  postage  are  saved  by  the  elimination  of  the  advice. 


WHEN  CREDITING  OR   REHITTINa   FOR  Q    f^ 
THESE    ITEMS    DESCRIBE    BY    THE    NO.  O.V/. 

THE  CANADIAN  BANK  OP  COMMERCE 

191.  . 

WE  ENCLOSE  FOP  CREDIT  OR  REMITTANCE  ITEMS  AS  USTED  BELOW: 

1 

Manager 

Figure  21 
CASH  ITEM  OR  SHORT  DATE  DRAFT  ACCOUNT 


144.  Remittance  book. — This  book  was  originally 
used  simply  to  record  the  remittances  from  other  banks 
and  the  distribution  of  the  proceeds;  but  it  gradually 
developed  into  a  general  sorting-out  book  for  the  cash 
book,  and  is  particularly  useful  in  connection  with  the 
mail  work.    All  credits  for  cash  items  account  should  be 


170 


ACCOUNT 

No 


.191.. 


BRANCH  CLEARINGS  ACCOUNT 


DR. 


CB. 


Date 
u(  List 


Branch 


"At  Credit" 
advices  received 


Check  lists  sent 


HeadOflBce 
(debiU  to) 


Total... 
Balance. 


Amount 


Date 


Branch 


Check  lisU 
received 


"At  Credit" 
advices  sent 


Head  Office 
(credits  to) 


Total. . . 
Balance. 


Amount 


The  balance  to  be  carried  forward  from 
this  account  should  be  written  on  a 
LOWER  line  than  that  on  which  the 
balance  from  the  previous  day  is 
given. 


I  have  compared  the  above  entries 
with  the  relative  At  Credit  slips, 
checked  the  summations,  and  have 
compared  the  balances  shown  with 
the  figures  of  the  General  Ledger. 


.Aeeouniant 


Extreme  care  must  be  taken  to  avoid  errors  of  any  kind  in  this  Return 

Figure  23 
171 


172 


BANKING   PRACTICE 


!■' 


P 


entered  here  and,  if  possible,  all  the  entries  for  branch 
clearings  account,  in  order  to  form  a  check  on  the  com. 
pleted  statement.  The  ruling  and  headings  vary  in  dif- 
feient  banks,  but  a  good  form  is  shown  in  Figure  22. 

The  bulk  of  the  entries  for  tliis  book  arrive  in  the 
morning  mail. 

All  remittances  from  correspondents  are  first  entered 
^  in  the  sundry  debit  column,  and  the  credits  distributed 
to  the  cash  items  and  ledger  columns,  etc.  The  credit 
advice  slips  from  the  branches  are  then  entered  in  the 
same  way,  and  a  balance  struck  for  the  morning  maU 
the  credits  equalling  the  debit  columns.  The  totals  can 
then  be  handed  to  a  teller  for  entry  in  his  book.  A  ma- 
chine list  can  be  pinned  to  the  remittance  checks  if  drawn 
on  the  same  place,  and  only  the  total  entered  on  the  check 
list,  the  particulars  already  having  been  recorded. 

Returned  cash  items  are  also  entered  in  this  book, 
being  credited  in  the  cash  items  column  and  debited  in 
the  sundry  column  to  the  endorsers,  only  the  totals  being 
handed  to  the  teller. 

This  book  is  most  useful  in  sorting  out  and  blocking 
the  work.  ° 

At  the  end  of  the  day  the  credit  to  cash  items  should 

mclude  everything,  and  can  be  entered  directlv  into  the 

cash  book.    The  debits  and  credits  for  check  lists  can  be 

entered  as  totals  at  the  foot  of  their  respective  columns 

(branch  clearings),  as  well  as  any  other  entries  from 

the  tellers  for  branch  clearings  not  already  included. 

Ihe  totals  thus  arrived  at  can  be  entered  in  pencil  in 

the  cash  book.    If  the  latter  balances,  the  branch  clearing 

statement  can  then  be  written  up  and  balanced,  thu« 

reducing  the  risk  of  errors  to  a  minimum. 

143.  Branch  clearing  statement—In  a  branch  system 
there  must  of  necessity  arise  each  day  numerous  entries 


BRANCH    B(K)KS    AND    RECORDS 


173 


between  the  branches  themselves,  and  between  the 
branches  and  head  office.  Direct  accounts  between 
branches  are  out  of  the  question,  separate  accounts  with 
head  office  cumbersome,  especially  when  the  branches 
are  at  all  numerous.  The  most  satisfactory  method  in 
use  is  what  is  known  as  the  branch  clearings  system. 
This  is  a  simple  and  ingenious  system  which  makes  the 
head  office  the  clearing  nouse  for  all  inter-branch  transac- 
tions. The  medium  is  a  statement  called  the  branch 
clearings  statement  which  is  sent  to  the  head  office  daily 
by  each  branch,  and  on  which  are  entered  all  transac- 
tions with  the  other  branches  and  with  the  head  office. 
(See  Figure  23.) 

So  far  as  possible,  the  entries  passing  through  branch 
clearings  account  consist  of  totals  only.  No  particulars 
are  necessary  exCept  the  name  of  the  branch  credited  or 
debited. 

Check  lists  originate  as  debits  and  are  responded  to 
by  credits.  "At  credit"  advice  slips  originate  as  credits 
and  are  responded  to  by  debits.  Head  office  entries,  both 
debit  and  credit,  originate  at  the  branches. 

All  entries  for  the  statement  should  be  systematically 
arranged  both  as  to  classification  and  the  order  of  the 
branches.  At  the  end  of  the  day  the  branch  clearings 
statement  is  added  and  the  totals,  debit,  and  credit  en- 
tered in  the  cash  book.  The  statement  is  then  balanced 
with  the  general  ledger  by  the  addition  of  the  morning 
balance,  carefully  checked,  and  forwarded  to  head  office 
the  following  day.  No  change  is  permissible  in  the  en- 
tries. They  must  be  credited  or  debited  to  the  statement 
exactly  as  received.  Errors  in  check  lists  or  advices  must 
be  corrected  by  the  creation  of  a  separate  entry. 

It  is  imperative  that  absolute  accuracy  be  assured  at 
all  times,  and  all  statements  must  be  carefully  checked 


174 


BAxVKING    PRACTICE 


■ill 


I  i 


■'? 


both  as  to  entries  and  summations.  The  slightest  error 
may  necessitate  a  tremendous  amount  of  work  in  the 
head  office  in  locating  the  difference.  Perfunctory 
checkmg  ,s  therefore  inexcusable  and  should  be  severely 
penalized.  A  delay  of  a  day  in  forwarding  the  state'- 
ment  allows  time  for  checking,  and  has  the  further  con- 
hrmation  of  a  balanced  cash  book. 

146.  At  credit  adiices.-With  the  exception  of  check 
lis  s,  no  branch  debits  another  branch  in  this  statement 
without  first  receiving  an  advice  on  an  "At  credit"  slip 
(See  Figure  24.)  ^' 

AH  other  items  collected  by  one  branch  for  another 
during  a  day  are  entered  on  an  "At  credit"  slip,  the 
total  of  which  IS  credited  on  the  branch  clearings  state- 
ment against  the  name  of  the  branch  interested,  and  the 
advice  IS  then  mailed  direct  to  the  latter,  a  carbon  copy 
being  retamed  for  record.    Immediately  on  receipt  of  the 
advice  the  total  amount  is  debited  in  branch  clearings 
agamst  the  name  of  the  advising  branch,  and  the  items 
credited  to  their  several  destinations.    The  credit  entry 
is  thus  offset  and  ticked  off  in  due  course  at  head  office. 
Some  offices  will,  of  course,  require  the  use  of  a  much 
larger  advice  slip  than  the  form  shown. 

Two  columns  will  be  noticed  in  the  advice.  The  first 
column  IS  used  for  debits  already  created  at  the  credited 
branch,  which  await  the  relative  credits  in  ''Cash  items 
account." 

The  second  column  is  used  to  advise  all  other  credits 
such  as  collections,  deposits,  collaterals,  trade  biUs  paid 
out  ot  date,  and  other  similar  items. 

Cash  items  consist  principally  of  sight  items  and  ma- 
tured  trade  bills,  and  these,  on  the  receipt  of  the  advice, 
are  marked  off  as  paid,  and  the  first  column  of  the  ad- 
vice  credited  to  the  account  as  a  total. 


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175 


176 


BANKING    PRACTICE 


147.  Head  office  entries,— Head  office  entries,  both 
debit  and  credit,  originate  with  the  branches  in  everj- 
case.  The  entries  can  be  made  either  in  red  ink  at  the 
foot  of  the  branch  clearings  statement,  or  else  entered 
on  a  special  form  in  detail,  and  only  the  totals  entered 
into  the  statement.  Figure  25  is  comprehensive  and 
allows  for  an  analysis  of  the  contents  of  all  money  par- 
cels debited.  All  debits  and  credits  on  correspondents 
originating  at  the  branches,  are  passed  through  head 
office  account.  Lists  of  dividend  warrants,  profit  and 
loss  entries,  expense  checks  and  other  head  office  matters 
are  all  entered  here. 

In  case  of  a  general  credit  to  head  office  being  required 
from  all  the  branches,  say,  for  pension  or  guarantee 
fund,  it  is  better  for  head  office  to  make  out  the  debits 
to  the  different  branches  and  obtain  credit  in  one  amount 
through  the  main  branch,  which  will  distribute  these 
debits  to  the  various  branches  in  its  check  lists.  This 
method  not  only  obviates  any  mistakes  by  the  branches 
in  making  a  credit,  but  very  much  simplifies  head  office 
bookkeeping. 

148.  Business  with  other  banks. — Transactions  be- 
tween Canadian  banks  are  generally  effected  through 
the  daily  clearing,  and  very  seldom  through  the  medium 
of  an  account.  Foreign  correspondents  generally  carry 
a  deposit  account  at  one  of  the  large  offices  to  which  any 
collections  made  for  them  by  any  of  the  branches  are 
credited  or  drafts  drawn  debited.  :Most  accounts  tcith 
correspondents,  however,  are  more  conveniently  carried 
at  the  head  office;  all  debits  and  credits  originating  with 
the  branches  being  advised  through  the  branch  clearings 
account.  Daily  statements  from  the  correspondents 
give  the  responding  entries,  and  the  accounts  are  kept 
in  constant  adjustment.    Not  only  does  this  concentra- 


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C-VIII— 12 


177 


178 


BANKING   PRACTICE 


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tion  in  head  office  simplify  the  bookkeeping,  but,  as  the 
balances  with  correspondents  frequently  form  an  im- 
liortant  part  of  a  bank's  reserve,  it  enables  the  head  office 
to  control  the  balances  accordingly. 

149.  Teller's  records.~The  teller's  cash  book  or  blot- 
ter  is  shown  in  Figure  26.  It  consists  of  a  skeleton  ruling 
with  no  printed  headings,  these  being  written  in  daily 
by  the  teller  according  to  his  requirements.  Were  the 
headings  printed  it  would  require  a  specially  printed 
book  for  each  class  of  teller,  and  even  then  it  might  not 
be  suitably  spaced  for  local  requirements. 

A  teller  should  arrange  his  entries,  debit,  and  credit 
to  conform  with  the  general  system  of  the  office.  Checks 
should  be  sorted  out  and  entered  according  to  the  divi- 
sions of  the  ledger,  thus  balancing  with  the  various  sup- 
plementaries.  If  the  checks  are  very  numerous,  separate 
sheets,  suitably  ruled,  can  be  used;  these  can  be  entered 
on  an  adding  machine  or  by  an  assistant. 

In  large  branches  where  cash  items  and  checks  on  out- 
side points  are  numerous,  the  form  given  in  Figure  27 
can  be  used  with  advantage.  Each  item  shows  its  ex- 
change, and  the  totals  only  are  entered  on  the  blotter. 
At  the  end  of  the  day  the  sheets  from  the  various  tellers 
are  combinet"  by  the  cash  item  clerk  for  balancing  pur- 
poses, errors  thus  being  easily  located. 

A  teller's  book  is  in  reality  a  skeleton  cash  book,  and 
the  entries  should  be  so  arranged  that  the  books  of  the 
various  departments  should  balance  with  the  combined 
entries  of  the  tellers. 

Figure  28  is  used  at  the  end  of  the  day  as  a  balance 

book  and  record  of  cash  in  hand ;  it  is  self-explanatory. 

All  parcels  of  money  received  are  acknowledged,  and 

entered  in  a  special  book.    ( See  Fig.  29. )     If  the  advice 

comes  in  first  it  should  be  at  once  entered  in  this  book, 


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179 


S: 


BRANCH    BOOKS    AND   RECORDS  181 

and  the  parcel  inquired  for  if  necessary.  Money  parcels 
<Iespatched  are  entered  in  a  book  ruled  as  in  Figure  80. 
(;reut  care  is  necessary  in  handling  nione>  parcels. 
Hoth  sent  and  received  parcels  should  be  counted  by  two 
mtii  in  each  other's  presence  and,  in  the  case  of  tlie 
loiiner,  it  is  necessary  to  have  the  parcel  in  the  uninter- 
iiil)te(l  custody  of  two  men  from  the  time  it  is  counted 
and  sealed  until  it  is  delivered  to  the  express  company 
or  post  office. 

The  relative  advices  and  acknowledgments  should  be 
carefully  watched  and  any  delay  immediately  inquired 

into. 

130.  General  ledger.— The  general  ledger,  next  to 
the  cash  book,  is  the  most  important  book  in  a  branch; 
ir.  fact  it  is  equally  important,  though  in  a  different  sense.' 
The  cash  book  is  the  book  of  ^  '-inal  entry,  and  contains 
a  clironological  record  of  all  tl .  transactions  of  a  branch. 
The  general  ledger  contains  the  summary  or  analysis  of 
these  transactions  under  the  various  headings,  while  its 
subsidiary  books,  the  deposit  and  liability  ledgers,  sum- 
marize the  amount  due  to  or  from  individuals  re- 
spectively The  general  ledger  is  posted  every  day 
troni  the  cash  book,  and  contains  all  accounts  necessary 
to  show  the  position  of  a  branch,  with  regard  to  the  busi- 
ness done  under  the  various  classifications  called  for  by 
the  government  statement.  As  a  matter  of  fact,  how- 
ever, the  accounts  kept  in  the  average  branch  ledger  are 
not  very  numerous  and  consist  broadly  of: 

Assets — cash,  loans; 

Liabilities — liabilities  to  the  public; 

Office  Accounts— profit  and  loss,  branch  clear- 
ings, etc. 

The  profit  and  loss  and  branch  clearings,  accounts  are 
internal  accounts,  and  may  be  either  debit  or  credit. 


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189 


BRANCH    BOOKS    AND    RECORDS 


183 


The  latter  is  the  adjusting  account  of  the  branch  with 
the  bank  as  a  whole,  and  varies  approximately  with  the 
difference  between  its  loans  and  deposits,  as  every  branch 
either  supplies  funds  to  the  head  office  or  the  reverse. 

Loans  are  generally  carried  under  two  headings,  loans 
and  trade  bills,  though  in  a  large  city  office  ♦:hey  are  fre- 
(juently  sub-divided  into  half  a  dozen  accounts.  This  is 
merely  a  matter  of  convenience,  however.  In  the  same 
May  the  liabilities  are  divided  into  ordinar)  and  interest- 
bearing  deposits,  etc.  The  form  most  generally  used  is 
given  in  Figure  31.  It  is  advisable  to  have  fifty  or  more 
pages  in  a  book  ruled  with  single  columns  instead  of 
double.  The  former  ruling  affords  a  very  wide  particu- 
lar column  for  accounts  calling  for  full  details,  or  the 
space  can  be  ruled  by  hand  for  a  special  analysis  of  an 
account.  In  some  offices  a  form  of  the  Boston  ledger 
commonly  found  in  the  United  States  (Figure  32)  is 
used  with  advantage,  and  also  an  adaptation  as  de- 
scribed in  the  next  section. 

15  V  Cash  book  ledger. — A  combined  form  of  cash 
book  and  general  ledger  is  shown  in  Figure  33.  This 
form  permits  the  whole  of  the  cash  book  entries  for  one 
day  to  be  entered  on  a  page  and,  at  the  same  time,  dis- 
I)enses  with  the  necessity  of  posting  the  general  ledger, 
as  the  relative  cash  book  totals  have  only  to  be  added 
to  or  deducted  from  the  general  ledger  balances  of 
tlie  previous  day  and  extended  into  the  next  ledger 
columns. 

The  first  two  columns  on  the  page  shown  in  Figure  33 
represent  the  debit  and  credit  balances,  respectively,  of 
tile  general  ledger  at  the  close  of  business  on  the  previ- 
ous day.  The  next  column  gives  the  printed  names  of  all 
tbe  accounts  in  the  ledger.  To  the  right  are  the  debit 
and  credit  columns  of  the  cash  book  in  which  are  entered 


a 

St 

n 


a  ou 


u 


3 

■•£ 

P4 


00 

6 


ill 


II 


I 


184 


I  < 


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o 


185 


:: '  -1 


f  ^ 


Sherhrooke,  Que., 


190 


GENERAL 
LEDGER 


Ur 
Balances 


Cb. 

Balances 


Cash  Book, 


Bank  Premisea 

Bank  Furniture 

Real  Estate  (other  than  Bank  premises) 

Mortgages  on  Real  Estate 


6. 
7. 
8. 
9. 
10. 


Cash  in  Treasury 

"      "  hands  of  Tellers 
Call  on  Loans  on  Stocks  and  Bonds 
Nqtes  Discounted  Current 


11.  Bills 

12.  Produce  Loans 

13.  Notes  and  Bills  Overdue 

Jl  ou "     ^'        "    P"*  Due 
15.  Short  Date  Draft  Account 


16. 
17. 

18.  Canadian  Bonk  of  Commerce 

19.  National  Park  Bank,  N.  Y. 


National  Exchange  Bank,  Boston 
First  National  Bank,  Portland 


N. 


Y.  State  National  Bank,  Albany 


26.  First  National  Bank,  N.  Y. 

28.  Com  Exchange  Bank,  N.  Y. 

29.  Drafts  Issued  on  London 

30.  Bank  of  Montreal,  Quebec 


CASH 
BOOK 


Credits 


Debits 


31.  Cash  Items 

32.  Head  Office 

33.  Branch  Clearings 

34.  Remittance  Account 
•So. 


3C.  Discount  and  Interest 

37.  Inland  Exchange 

38.  Foreign  Exchange 

39.  Expense  Account 

40.  Salaries 


41.  Deposits  on  Demand 

42. 

43.  Deposits  after  Notice 

44. 

45.  Draft  Account 


46.  Dominion  Government 

47.  "  " 
48. 

49.  Provincial  Government 
50. 

51. 
52. 
53. 
54. 
,55. 


186 


Supply  Draft 


FlOUBE  Si 


BANK 


Sherbrooke,  Que., 


190 


DETAILED  ENTRIES 

MEMORANDA 

Credith 

Debits 

lat  Teller 
2nd    " 
3rd     •• 
4th     " 
Dnfu 

- 

*^ 

DiMounti 

Inland 

Remittaneei 
Excbanob 

r 





DlSCOUN 

T  AND  Interest 

DOMINIO 

N  Government 

— 

Corn  Ex 

CHANQE  Bank 

National  Exchahob  Bank 

N.  Y,  State 

National  Bank 

t 

- 

Cash  Statement 

1st  Teller 
2nd    •• 
3rd     •' 
4th     *• 

Total 

Cam  Book  Leikibk. 


187 


FiQCRk:  33  (continued) 


188 


BANKING    PRACTICE 


i 


i 


; 


the  totals  from  the  supplementary  hooks  and  the  sub- 
totals of  the  various  accounts  detailed  in  the  halance  of 
the  rulings.  \Vhen  the  cash  hook  is  halanced  the  ledger 
is  posted  and  ready  for  extension. 

The  ruling  of  the  rest  of  the  page  is  similar  in  form 
to  that  shown  in  Figure  10,  hut  with  single  columns  in- 
stead of  douhle  (dehit,  particulars,  credit).  These  sul)- 
columns  are  used  for  detailed  entries,  and  there  is  space 
for  the  equivalent  of  one  or  more  pages  of  Figure  10. 
When  the  accounts  in  the  suh-colunms  have  daily  en- 
tries the  headings  can  he  printed. 

There  are  comparatively  few  headings  to  write  in  this 
form  of  cash  hook,  as  they  are  all  i)rinted,  and  the  writ- 
ing up  need  not  he  started  until  late  in  the  afternoon. 
The  totals  from  the  books  can  he  entered  direct  into 
the  main  columns,  and  the  vouchers  and  sundry  matters 
detailed  under  their  respective  headings  in  the  sub-col- 
umns. ^Vhen  the  entries  are  complete  all  the  columns 
should  be  added  in  pencil,  a  balance  struck,  and,  if  cor- 
rect, the  various  detailed  accounts  extended.  The  totals 
are  entered  in  the  main  columns,  debit  and  credit,  re- 
spectively, the  final  addition  of  these  columns  completing 
the  work  of  the  day. 

The  extension  of  the  ledger  balances  calls  for  no  ex- 
planation. In  order  to  facilitate  the  carrying  of  an  ex- 
tension over  a  page,  a  sharp  rule  is  used  in  the  printing, 
which  makes  a  fine  incision  in  the  paper  to  the  right  of 
the  ledger  columns,  and  enables  them  to  be  neatly  folded 
back  on  the  previous  page. 

The  advantages  of  this  form  of  cash  book  may  be 
briefly  stated  as  follows: 

1.  It  presents  at  a  glance  the  whole  of  a  day's  work  on 
one  page,  which  facilitates  checking  and  renders  the 
supervision  of  the  manager  more  comprehensive. 


BRANCH    I!()OKS    AND    RECORDS 


189 


'p 


'r 


2.  It  economizes  labor  and  enables  the  services  of  the 

cash  book  clerk  to  be  utilized  in  other  directions,  and 
also,  owing  to  the  printed  headings,  minimizes  the 
danger  of  omissions,  even  by  a  new  clerk. 

3.  By  eliminating  the  ledger  posting  it  saves,  dally, 

twenty  to  thirty  minutes,  or  more,  of  a  senior  offi- 
cer's time. 
i.  It  is  capable  of  expansion  or  contraction  (horizontal 
or  vertical),  to  meet  the  requirements  of  any  office, 
although  a  book  19  inches  by  IH  inches  in  size  should 
be  ample  for  the  entries  of  a  very  large  office. 

The  general  ledger  is  balanced  daily ;  the  fluctuations 
in  the  balances  can  be  closely  watched  and  the  rea- 
sons promptly  located. 

Those  Avho  prefer  to  continue  the  ledger  as  a  sep- 
arate book  can  dispense  with  the  two  ledger  balance 
colunms,  and  still  have  a  compact  and  labor-saving 
cash  book. 

1.52.  Current  deposit  ledger. — The  ordinary  or  cur- 
rent deposit  ledger  is  a  very  active  and  important  book 
in  a  bank,  and  one  which  calls  for  both  accuracy  and 
(l('sj)atch  on  the  part  of  the  clerk  in  charge,  as  errors  can 
easily  be  made,  involving  the  bank  in  serious  loss.  The 
deposit  ledger  is  invariably  a  loose-leaf  book  and  ruled 
as  shown  in  Figure  3-i.  This  form  is  invariably  used 
I)y  all  the  banks.  The  so-called  Boston  ledger  has  been 
tried  several  times,  but  was  not  found  practicable  in 
C  aiiada,  owing  perhaps  to  the  method  of  marking  or 
aeeepting  checks  by  a  direct  debit  to  the  account.  The 
aeeounts  are  arranged  alphabetically,  and  are  therefore 
self -indexing,  but  an  index  is  usually  kept  on  the  tagged 
slieet  dividing  the  alphabet. 

In  small  offices  there  is  usually  only  one  current  ledger 


«fi 


HllANCH    BOOKS    AND    RECORDS 


101 


used:  A-Z.  As  work  increases  and  becomes  too  much 
for  one  ledger-keeper,  a  second  ledger  can  be  opened 
divided  A-K  and  L-Z.  For  three  ledgers  the  divisions 
generally  run  A-G:  H-O:  and  P-Z,  and  for  four  the 
divisions  are  A-C:  D-K:  L-R:  and  S-Z. 

As  the  ledger  is  loose-leafed  there  is  no  accumula- 
tion of  dead  leaves,  but  the  general  regulations  regarding 
loose-leaf  ledgers  given  in  Section  181  should  be  closely- 
observed. 

There  are  in  every  ledger  a  number  of  casual  and  petty 
accounts,  transactions  in  which  are  infrequent.  The 
best  disposition  to  make  of  this  class  of  account  is  to 
carry  them  in  the  front  of  each  alphabetical  division  di- 
rectly behind  the  index  page  and  to  give  each  account 
one  column  on  the  page.  As  the  accounts  are  closed  off 
new  accounts  can  be  opened  immediately  under  the 
closed  accounts.  In  this  way  no  space  is  wasted,  and  the 
only  balance  in  each  column  is  the  last.  Some  banks  pre- 
fer to  carry  their  petty  and  inactive  accounts  in  a  small 
or  petty  ledger,  the  two  ledgers,  of  course,  being  com- 
bined for  balancing  purposes.  This  is  of  advantage,  es- 
l)eeially  if  there  are  a  large  number  of  these  accounts. 

The  posting  is  invariably  made  direct  from  the  orig- 
inal deposit  slips  and  vouchers,  and  called  back  or 
checked  from  the  supplementary  cash  book.  The  bal- 
ances should  be  kept  constantly  extended,  and  checked 
from  time  to  time  by  the  additions  of  the  debit  and  credit 
columns. 

153.  Savings  bank  ledger. — This  book  is  invariably  in 
loose-leaf  form,  ruled  as  in  Figure  35,  in  size  generally 
aJMiut  8"  X  11".  In  a  small  branch  one  ledger  suffices  as 
a  rule,  but  in  the  larger  offices  half  a  dozen  or  more  are 
required.  The  accounts,  though  very  numerous,  are 
small  in  amount,  and  a  leaf  is  used  for  each  account. 


:    I 


10^ 


BANKING    PRACTICE 


m 


The  signature  of  the  depositor  is  generally  taken  o^i  the 
ledger  sheet  for  eonvenience  of  referenec,  as  well  as  on 
a  signature  card. 

The  rules  given  in  Section  131  should  be  carefully  foj- 
lowed.  The  manager  must  control  the  sheets  and  sign 
all  that  are  inserted  in  the  ledger.  The  blank  pass- 
books, which  are  simi)ly  small  copies  of  the  ledger  sheet, 
must  also  be  kept  in  the  custody  of  the  manager,  and 
given  out  in,  say,  dozen  lots,  to  be  accounted  for  as  used. 
It  is  advisable  that  no  name  shall  appear  on  the  pass- 
book; just  the  account  number. 

The  accounts  are  nrranged  sometimes  alphabetically 
and  sometimes  numerically.  Both  methods  have  their 
adherents.  In  either  case  they  are  indexed  on  the  tagged 
divisions  or,  in  some  cases,  in  a  separate  book.  Where 
the  accounts  are  very  numerous  the  ledgers  are  balanced 
in  blocks  of  one  or  two  ledgers  each,  and  in  this  way 
errors  are  easily  located.  A  starting  point  is  taken  at 
some  balancing  period,  say,  for  three  ledgers,  and  a 
memorandum  taken  at  the  back  of  each  ledger  of  its 
balitnce.  A  supplementary  cash  book,  with  three  credit 
and  three  debit  columns,  is  used,  and  the  vouchers  sorted 
and  entered  accordingly.  The  total  difference  between 
the  first  columns  at  any  time  added  or  deducted,  as  the 
case  may  be,  from  the  balance  at  the  back  of  the  first 
ledger,  should  give  the  balance  of  the  first  ledger  to 
date,  and  so  with  the  second  and  third  ledgers.  Finally, 
the  combined  balances  of  the  three  ledgers  equal  the  con- 
trolling balance  in  the  general  ledger. 

154.  Liahility  ledger. — This  book  bears  the  same  re- 
lation to  a  bank's  advances  as  the  deposit  ledger  does  to 
the  deposits.  The  latter  shows  how  much  the  bank  owes 
each  customer,  and  the  former  how  much  each  customer 
owes  the  bank.    The  liability  ledger  never  shows  an  ac- 


MUAMII     H(H)KS    AM)    UKCOUDS 


VXi 


((Hint  ill  cri'dit  •md  the  (k'[>osil  ledger  should  never  show 
all  aceoiiiit  at  debit. 

'riiere  are  many  different  kinds  of  liability  ledgers  in 
use.  some  very  elaborate.  The  simpler  forms  are  the 
more  practical,  the  main  object  being  to  see  at  a  glance 
liow  much  of  each  kind  of  paper  a  customer  has  under 
(lisiount,  the  names  of  security  against  each  note,  and 
till-  total  amount  of  the  advances. 

A  simple  form  is  given  in  Figure  86.  This  provides 
j)r()gressive  balances  for  loans  and  trade  bills,  and  space 
for  particulars  of  securities,  other  names,  etc.  The  total 
of  the  loan  and  trade  bills  at  any  time  shows  the  amount 
of  the  customer's  total  direct  liability  to  the  bank.  Fre- 
quently, however,  a  customer  is  an  obligant  either  as 
maker  or  endorser  on  a  note  discounted  for  another  cus- 
tomer, and  it  is  important  for  the  bank  to  know  how 
much  of  such  indirect  liability  is  outstanding.  This  class 
of  paper  can  be  indicated  by  an  entry  in  red  ink,  but  is 
omitted  of  course  from  the  balance,  as  it  has  been  posted 
once  to  the  account  of  the  customer  discounting  it.  In 
this  way  a  note  with  half  a  dozen  endorsers  can  be  re- 
corded against  each  account  in  red  ink  without  affecting 
the  ledger  balance. 

AN'here  accounts  involve  the  discounting  of  a  large 
amount  of  trade  paper,  small  loose-leaf  books  are  used, 
known  as  "Blue  Books"  (see  Figure  87),  one  for  each 
account,  and  by  this  means  track  is  kept  of  the  total 
amount  due  by  each  borrower's  customers.  When  a  blue 
book  is  used,  the  totals  only,  debit  or  credit,  are  entered 
in  the  ledger,  no  details  being  required.  The  resulting 
balance  in  the  account,  however,  should  agree  with  the 
total  of  the  balances  in  the  blue  book.  The  total  amount 
of  trade  bills  in  an  account  is  not  of  great  importance, 
provided  all  the  paper  represents  goods  sold  and  deliv- 

C_VIII_13 


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194 


miANCH    BOOKS    AM)    HIXORDS 


105 


vin\  \n  resfmiisible  purchasers.  The  total  amount  on  any 
niu  mmie,  however,  is  vitally  im|)f»rtant,  and  should  not 
Im  allowed  without  special  consideration  to  exceed  3 
|K  I-  cent  of  the  total  amount  of  trad*  bills. 

!.>.>.  Collection  register.— The  form  shown  in  Figure 
;W  is  nn  eeonomieul  ruling,  as  it  oidy  occupies  one  page 
and  gives  .11  required  particulars.  If  necessary  two 
lines  can  he  used  for  an  item  which  requires  a  fuller  de- 
scription than  ordinary.  The  entry  of  the  name  of  the 
tiijikcr  or  drawee  is  unnecessary,  for,  in  the  case  of  a  note 
nr  accepted  draft,  it  is  entered  at  once  in  the  collection 
<iiaiy,  where  space  is  provided  for  the  maker's  name.  If 
it  is  a  draft  for  acceptance,  the  drawee's  name  is  entered 
in  the  messenger's  book,  and  in  due  course  the  draft  is 
titlicr  returned  refused  to  the  correspondent  or  entered 
in  the  diary. 

III  the  case  of  customers  who  have  a  large  number  of 
colicctions,  separate  forms  are  frerpiently  provided,  on 
nliich  the  customer  lists  the  items  himself  and  the  bank 
tilts  the  list  in  a  binder  as  its  register  and  diary,  adopting 
till'  customer's  number  as  its  own.  An  initial  letter  or 
|>n  tix  nimiber  can  be  used  to  distinguish  one  account 
1 11)111  another.     (Figure  78.) 

Collection  diaries  are  very  similar  in  form  to  those 
used  lor  bills  for  discount,  and  need  no  special  descrip- 
tion. 

1)0.  Collateral  register. — The  collateral  register  is 
«(!ieially  a  loose-leaf  book  with  an  alphabetical  index, 
nilcd  as  in  Figure  39.  A  page  is  given  to  each  account, 
nid  the  balance  should  always  show  the  amount  of  notes 
lield  as  collateral.  The  collection  diary  is  used  to  diarize 
niilateral  notes,  the  entries  being  made  in  red  ink  to  dis- 
tintTuish  them  from  ordinary  collections.  Where  a  large 
number  of  collaterals  are  received  from  customers  thev 


i 


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of 
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196 


BRANCH    IWK)KS    AND    RECORDS 


19: 


can  be  listed  on  separate  slieets  and  the  totals  only  en- 
tered in  the  register.     ( Figure  78. ) 

1.57.  Letters  received  register. — Ail  letters  received 
I»y  a  branch  containing  check  lists  or  other  cash  enclo- 
int'S  should  be  numbered  and  entered  in  detail  in  a 
rei(ister  ruled  as  in  Figure  40.  i^ill  other  letters  contain- 
ing; enclosures,  other  than  ca  h,  should  also  be  numbered, 
but  need  only  be  entered  in  ulk  in  the  register:  for  in- 
stance, Nos.  642  to  664.  This  is  done  by  the  manager 
or  accountant  immediately  on  the  opening  of  the  mail 
and  before  it  is  distributed  and  initialed  by  the  various 
(lt'])artments.  The  numbered  letters  are  used  the  next 
morning  by  the  checking  officer  to  see  that  every  enclo- 
sure has  been  properly  dealt  with. 

I  f  a  special  column  is  given  to  branch  check  lists,  the 
total  only  need  be  given  the  teller  to  balance  the  lists 
w  ith.  and  the  branch  statements  can  be  entered  up  from 
tilt  registfir  at  the  end  of  the  day. 

The  letters  despatched  register  is  useful  as  a  record  of 
liostage  expenditure.  Some  banks  enter  the  address  and 
l>ostage  of  every  letter,  but  the  same  purpose  is  attained 
with  less  work  by  entering  only  the  special  letters  in  de- 
tail and  bulking  the  routine  correspondence  according 
to  postage,  so  many  letters  at  two  cents,  etc.  Before 
taking  the  mail  to  the  post  office  the  letters  should  be 
counted  and  checked,  as  to  postage,  by  another  officer, 
who  will  initial  the  book  to  that  effect.  No  special  ruling 
is  required;  an  ordinary  pass-book  will  serve  the  pur- 
pose. 

158,  General  statement  books. — In  cornection  with 
the  monthly  return  to  the  government  each  branch  for- 
wards to  its  head  office  a  complete  financial  statement  of 
its  affairs  at  the  close  of  business  on  the  last  day  of  the 
month.    This  is  obtained  from  the  general  ledger,  and  a 


198 


RANKINC;    I'KACI'Ki-: 


1   t 


copy  of  the  .statement  is  made  on  a  book  ealled  the  gener- 
al statement  book.  The  general  ledger  is  also  balanced 
weekly,  say,  on  the  8th,  15th  and  23rd  of  each  month, 
and  a  statement  sent  to  the  head  office  either  in  exact 
form  or  in  even  thousands,  the  latter  method  being  suffi- 
ciently close  for  all  general  purposes. 

159.  Past  due  hills  register.— 'Mhe  past  due  bills  regis- 
ter is  a  book  suitably  ruled  for  recording  past  due  bills. 
In  the  average  branch,  however,  there  is  hardly  a'ly 
necessity  for  a  separate  book,  and  full  particulars  should 
be  kept  in  the  general  ledger.  Some  banks  divide  their 
past  due  bills  into  tivo  classes,  past  due  bills  represent- 
ing those  items  whose  settlement  is  temporarily  de- 
layed, and  overdue  bills,  being  those  items  which  for 
one  cause  or  another  are  likely  to  remain  overdue  for 
oome  time. 

IGO.  Produce  hook.— The  produce  book  or  warehouse 
receipt  register  is  used  to  keep  track  of  all  loans  made 
against  grain  and  other  produce  under  Section  88  of  the 
Bank  Act.  It  is  nded  with  aiiiple  space  for  particulars, 
and  provides  progessive  balance  colunms  for  quantity 
and  value  of  the  securities  and  the  amount  of  the  ad- 
vances.   A  column  is  also  given  for  insurance. 

161.  Palance  hook,— The  balance  book  is  used  to 
record  the  trial  balances  and  adjustments  of  the  different 
accounts  in  the  office.  The  balances  should  be  taken  off 
on  loose  leaves  and  tiled  in  a  binder,  either  continuously 
in  chronological  order,  or  consecutively  under  tagged 
divisions,  one  for  each  class  of  balance.  The  divisions 
would  be  made  for  the  various  ledger  balances,  draft  ac- 
count, list  of  loan  and  trade  bills,  cash  items  account,  etc. 

162.  Overdraft  register.— li  is  very  important  that 
the  manager  should  be  fully  informed  of  the  amount  and 
nature  of  the  overdrawn  accounts  in  his  office.    Figure 


t 

-3 
-3 


'f. 


> 

O 


-,^ 


» 

Si 

u 

<    \ 

1 

V.           1 

a. 

< 

3 
■< 

-< 

3 
•< 

•< 

*>* 
S 

1 

•< 

V 

s 
s 

y. 

i 


199 


aoo 


BANKINCJ    PUACTICi: 


:*! 


4 1  is  used  for  this  purpose.    This  re^nster  sh«)iihl  he  writ- 
ten up  eaeh  morning  and  phiced  on  tlie  manager's  drsk. 

Utti.  Discrcpancicff  book: — Canadian  banks  are  y 
strict  in  their  rules  reganhng  the  correction  of  errors  iii 
the  l)()()ks,  any  erasures  heing  ahsohitely  forhi(hlen. 
Errors  discovered  immeihately  l)y  a  clerk  should  be 
neatly  cancelled  in  ink  and  the  correct  figures  entered 
above.  All  other  corrections  must  l)e  made  by  a  revers- 
ing entry  through  the  cash  book;  full  particulars  must 
l)e  entered  in  the  discrepancy  book  (see  Figure  42)  and 
comjjared  and  initialed  by  the  manager  or  accountant. 

104.  Pro  forma  .stationcri/  book.— Th\s  book,  if  prop- 
erly arranged  and  systematically  kept  up  to  date,  is  one 
of  the  most  useful  books  in  an  office.  It  should  contain 
specimen  forms  of  all  the  authorized  stationery  used  by 
the  bank.  Pro  forma  samples  of  all  routine  and  legal 
forms  should  Ije  given,  so  that  in  making  out  a  head  office 
return  or  filling  out  a  guarantee  form  the  best  arrange- 
ment and  wording  can  be  found  by  reference  to  the  sta- 
tionery book.  This  book,  therefore,  not  only  gives  the 
staff  the  benefit  of  being  able  to  see  all  the  forms  in  use 
in  the  bank,  but  also  enables  them  to  study  the  proper 
methods  of  filling  them  in. 

165.  Trcasiiri/  cash.— The  surplus  cash  of  the  branch 
is  kept  in  a  separate  compartment  of  the  safe,  called  the 
treasury,  and  under  the  joint  control  of  the  manager  and 
teller.  The  deposits  and  withdrawals  are  kept  track  of 
in  the  treasury  book,  ruled  as  in  Figure  43,  which  is  self- 
explanatory. 

166.  Special  registers.— It  is  only  in  a  very  large 
branch  that  there  is  a  sufficient  number  of  special  entries 
to  warrant  a  separate  book  or  register  for  each  class  of 
document,  and  in  the  ordinary  branch  it  will  be  found  of 
advantage  to  have  a  loose-leaf  book  with  tagged  divi- 


a 


/ 


X 

a 
J 

o 
s 

72 


r. 

y. 


< 

H 


OS 


p  !;    ^ 


Ui 


.  .  e  — 
III 


201 


fr 


T  R  E  A  S  L  It  V 


IN 

•HI 

oi  r 


Kiirwanl 

IfalaiHM' 

Maluiur 

llalaii.i' 

Halanco 

Haluiir<> 

Hulancr 

Balani'c 

iiulancr 

lialaiii'c 

Balanic 

Halitnrc 

Baluni'i' 

Balance 

Bnlanre 

Balanc<' 

Bala  lire 

BalaiiK 

Balaiiri 

BalaiMM 


n 


Vnri  H  ii(    i  Ml    UisK 


Forward 


$10 


S20 


f.'iO       $1(HI 


Tola  I 

(■    B    <.tC 


I.KIiAl, 


Bank      Other 


202 


Figure  43 


ItOOK 


1*  P  K  1-  I  K 


GnM 
KritHli 


Gold 
American 


Silver 


Copper 


203 


Total 
IN' or  OUT 


Teller's 
Initials 


,    Total 
Treasury 


Initials 


FlGlRK  43  (conlimicil) 


■ 


m- 


1! 


3  i  ,■• 


204 


BANKING    PHACTICi: 


sions.  Sheets,  blank  with  the  cxeeplion  of  a  date  aii.l 
munher  column,  should  l)e  used  with  this  book,  and  ruled 
by  the  aceuiuitant  aceording  to  requirements. 

The  following  headings  or  di^isions  for  the  several 
puri)oses  are  suggested,  the  first  eolinnns  being  the  num- 
ber and  date  received,  which  are  common  to  all  rulings: 


Poiter  of  Attorney: 


^erurilien  Lodged 
ax  Collateral: 


Constifuent 


Partii'uliirs 

tif  Sfciirity 

or  Debl 


Attorney 


Particulars,  etr. 


Amount  of 

Debt 

Set' u  red 


Amount 

of 
( 'ollaterul 


Depositor  and  Part  iculars 
Eacrom:  in  Brief  (taking  several  lines 

if  necessary) 


Resdutionn  of 
Incorporated  Co.' a, 
Municipalitiea,  etc. 


Securitiea 
Depoaited  for 
Sc^e-keeping 


From 
Whom 
Rec'd 


N'ame 

of 

Company 


Address 


Record 

of  Payment 

Surrender 


Xame  of 

Officer. 

etc. 


Description 

of  Package 

Lodged 


Date 

of 
Surrender 


Total 
Market  \aluf 
of  Collatefal 


Receipt,  etc. 


Particulars 

of 
Resolution 


Customer's 
Receipt 


'  i 


.11^ 


CHAPTER    V 


DEPOSIT    BUSINESS 


l<>7.  New  accounts. — As  a  rule  no  new  account  is 
opined  in  a  hank  except  under  the  authority  of  the  man- 
aycr  or  accountant,  expressed  by  initials  on  the  deposit 
sli|).  In  other  words,  the  privilege  of  a  checking  account 
should  be  extended  only  to  persons  who  are  known  to  be 
(if  o()(h1  character  and  reputation,  and  therefore  no  ac- 
count should  be  opened  with  a  stranger  until  he  has  been 
satisfactorily  identified.  To  do  otherwise  is  to  leave  an 
(ipciniig  for  fraud.  Ledger-keepers  are  usually  held 
Kjiiaily  responsible  with  the  tellers  for  any  deviation 
from  the  regulations  laid  down  in  connection  with  the 
01)111  ing  of  new  accounts,  especially  with  strangers. 

KiS.  Openins;  nccounts. — When  an  account  is  opened 
a  s|)ecimen  signature  of  the  depositor  duly  witnessed 
siionld  be  obtained  and  placed  on  file  for  ready  refer- 
HKc:  the  card  system  is  the  best.  In  the  case  of  a  firm 
01  company  a  specimen  signature  of  each  partner,  or  of 
the  properly  constituted  signing  officers,  respectively, 
siiould  be  taken.  If  a  power  of  attorney  is  filed,  a  speci- 
imn  of  the  attorney's  signature  as  such  should  be  placed 
o!i  tile. 

Every  customer  opening  an  accoimt  in  the  current  ac- 
count ledger  should  be  provided  with  a  pass-book  and  a 
liook  of  checks.  This  does  not  apply,  however,  to  out- 
of-town  customers,  copies  of  whose  accounts  are  usually 
Hilt  monthly  on  current  account  sheets   (Figure  44). 

«05 


e06 


DEPOSIT    BUSINESS 


f^l 


Cure  siiould  l)e  taken  in  handing  out  eheck  books  and 
other  supplies  to  customers.  The  nature  and  importance 
ot  an  account  should  govern  the  size  of  the  pass-book 
and  the  check  book  supplied. 

KJO.  Particulam  to  be  recorded  in  ledg'. — The  full 
name,  designation  or  occupation,  and  address  of  each 
customer  is  written  at  the  head  of  every  page  of  the  ac- 
count in  the  ledger.  If  the  customer  is  a  farmer,  his  lot, 
(oriccssion  and  township  as  well  as  his  post  office  address 
should  be  recorded.  A  concise  description  of  the  per- 
sonal appearance  or  other  mark  of  identification  of  all 
ciistoiiiers  who  cannot  write  their  names  should  be  noted 
in  file  ledger  or  on  the  signature  card.  Special  care 
shoui(i  be  taken  to  record  correctly  the  names  of  signing 
officers,  powers  and  the  like  of  benevolent  and  friendly 
societies,  lodges  and  other  bodies  of  this  kind. 

In  the  case  of  a  firm,  the  names  of  the  partners,  and, 
where  there  is  a  special  partnership,  the  date  of  its  ex- 
pii.  should  l)e  recorded  in  the  ledger;  if  a  trust  estate, 
the  names  of  the  trustees  and  in  the  case  of  corpora- 
tions, etc.,  the  names  of  the  officials  authorized  to  sign 
checks. 

In  the  case  of  powers  of  attorney  or  of  by-laws  au- 
thorizing officers  of  incorporated  companies  to  sign  for 
such  companies  lodged  with  the  bank,  the  record  should 
state  the  date  when  the  power  is  granted,  the  names  of 
the  persons  authorized  to  sign,  the  extent  of  the  power 
and  the  limitations  placed  upon  its  use,  if  any.  Special 
sheets  are  usually  supplied  for  recording  such  informa- 
tion in  order  to  obviate  the  necessity  of  carrying  forward 
tlie  particulars  from  page  to  page;  these  are  inserted  on 
the  front  of  the  account. 

170.  Partnership  accounts. — The  law  does  not  recog- 
nize co-partnerships  of  professional  men,  i.  e.,  in  contra- 


2U8 


BANKING    I'HACJ'Ki: 


lll!i 


.listmctioii  to  traders;    tlicrdorc.  the  individual  si^na- 
tiirc  of  each  member  is  rc(iuisite  to  paper  of  all  kinds. 
Otherwise,  if  an  account  is  opened  in  the  name  of  a  firm 
of  solicitors,  architects,  or  other  non-trading  partner- 
ships,  a  written  agreement  shouM  be  taken  (Figure  45) 
signed  by  each  of  its  members,  wherebv  they  undertake 
to  be  jointly  and  severaljy  liable  for  every  transaction, 
by  check,  note  or  draft,  signed,  made  or  endorsed,  en- 
tered  mto  with  the  bank  I)y  any  individual  member  of  the 
co-partnership  in  the  firm  name,  or  by  any  person  thev 
may  designate  to  transact  business  with  the  bank  on  their 
behalf.    In  the  latter  case  a  differently  worded  form  is 
used. 

171.  Conversion  of  partncrti/np  into  joint  stock  corn- 
pan?/.— The  conversion  of  a  partnership  into  a  joint 
stock  company  entails  upon  a  manager  the  immediate 
necessity  of  obtaining  from  them  and  placing  on  file  a 
copy  of  the  company's  by-laws,  so  that  all  transactions 
may  be  made  to  conform  to  legal  requirements;  and  it 
should  never  be  overlooked  that  a  partnership  differs 
from  a  corporation  in  that  the  latter  is  absolutely  re- 
stricted by  the  terms  of  its  charter,  and  its  ofl^cers  by  the 
authority  conferred  upon  them  by  the  by-laws.  The 
same  reasoning  necessarily  applies  to  new  customers  who 
are  already  joint  stock  companies. 

172.  Joint  accounts.— Where  a  deposit  is  made  to  the 
credit  of  two  parties  jointly,  the  form  which  should  be 
used  IS  as  follows:  "John  Smith  and  Jane  Smith,  or 
either  of  them,"  and  a  declaration  signed  by  both  should 
be  taken  m  every  instance  to  the  effect  that  the  bank  is 
authorized  to  pay  checks  on  the  account  signed  by  either 
or  both.    ( See  Figure  47. ) 

178.  Accounts  rvitk  married  women.— In  the  Province 
of  Quebec,  on  account  of  the  restrictions  imposed  by  the 


N()\-TRA DI .\< J    I'A HTN KIIMII I P 
SIONATIKE   BY   ANV   UICMUCR   TO   BlVn 


191 


To  THE  Manaueii 

THE BANK 


We,  the  undersigned,  composing  the fipm  of 

do  hereby  acknowledge  and  agree  that  we  are  and  wUl  be  jointly 

liable  and  responsible  to  the B\nk 

for  all  transactions  entered  into,  or  to  be  entered  into,  with  the 
said  Bank  in  the  name  of  our  said  firm  by  any  individual 
member  of  the  same,  and  that  the  signature  of  the  name  of  our 
firm  by  any  member  of  the  same  to  any  note,  bill,  draft,  check, 
receipt  or  other  document  shall  be  as  binding  on  us  as  if  such 
M^nature  had  been  affixed  by  each  of  us  respectively  under  our 
own  hands. 


t    -VIII— 14 


Figure  45 
209 


210 


BANKING    rUACTICE 


law  of  that  province  on  married  women,  it  is  essential 
that  tlie  fullest  particulars  should  be  obtained  at  the  time 
the  deposit  is  taken.  When  a  married  woman  makes  a 
deposit,  the  name  of  her  husband,  with  the  post  office 
address  of  each  (in  the  event  of  their  not  living  to- 
gether) ,  should  be  given.  Any  other  information  neces- 
sary to  identify  or  locate  the  depositor  should  be  noted. 

When  opeiu'ng  such  an  account  it  is  advisable  in  every 
Instance  to  obtain  the  husband's  authorization  to  with- 
draw money  (Figure  46),  as  without  this  she  would  be 
restricted  to  withdraw  an  amount  not  exceeding  $300 
in  all.  A  separate  authorization  on  each  withdrawal 
would  be  satisfactory,  but  this  is  not  always  convenient. 

In  the  Province  of  Quebec  no  married  woman  can 
enter  into  a  contract,  sign  or  endorse  a  note,  or  bind  her- 
self in  any  way  for  the  benefit  of  her  husband.  There- 
fore notes  signed  or  endorsed  by  married  women  should 
be  refused. 

The  law  in  this  respect,  however,  is  not  so  strict  in  the 
other  provinces,  but  recently,  by  a  judgment  of  the  Su- 
preme Court,  confirmed  by  the  Privy  Council,  it  was 
decided  that  a  married  woman's  guarantee  or  endorse- 
ment for  her  husband  is  void  unless  she  signs  indepen- 
dently (Stuart  versus  Bank  of  Montreal). 

Therefore  in  these  latter  provinces  if  it  is  found  ex- 
pedient or  necessary  to  have  a  wife  join  in  a  guarantee 
or  endorsement  on  her  husband's  behalf,  care  must  be 
taken  to  see  tiat  she  has  had  the  advice  of  her  friends, 
of  whom  her  husband  is  not  to  be  one,  and  of  a  lawyer 
other  than  her  husband's  legal  adviser,  with  a  declara- 
tion from  the  latter  that  slie  has  been  so  advised. 

174.  Waiver  and  authority  to  charge  hack. — An  au- 
thority (see  Figure  48)  to  charge  back  returned 
bills,  notes,  etc.,  should  be  taken  from  every  customer 


HUSBAND'S  AUTHORIZATION 
TO  OPEN  BANK  ACCOUNT 

For  use  in  Quebec 


To  THE  Manager  of 

THE 


BANK 


I  hereby  authorize  my  wife 

to  open  an  account  in  her  own  name  with  the 

Bank;  to  deposit  or  endorse  for  deposit  to  the 
credit  of  such  account,  money,  checks,  drafts  or  other  nego- 
tiable instruments;  to  receive  deposit  receipts  and  surrender 
the  same;  to  draw  cheques  upon  the  said  account  and  to  with- 
draw therefrom  the  whole  or  any  part  of  any  money  standing 
to  her  credit  in  such  account,  all  upon  such  terms  and  conditions 
as  may  be  agreed  upon  between  my  said  wife  and  the  said 
Bank;  and  generally  subject  to  terms  of  Art.  181,  C.  C,  to 
perform  all  acts  of  administration  with  regard  to  said  account. 
And  I  hereby  agree  to  hold  the  said  Bank  harmless  in  respect 
of  all  transactions  between  my  said  wife  and  the  said  Bank 
done  or  entered  into  in  pursuance  of  the  foregoing  authorization. 


.I?>1 


FlGlTRE   46 
511 


i 

9 


191.. 

To  THE  Manager 

THE BANK 

Dear  Sir: 

You   have  a   deposit   account   stauiing   in   the   name 
of" 

or  either  of  them." 
We  authorize  you  to  pay  and  charge  against  said  account  all 
sums  evidenced  by  checks  on  your  branch  or  other  vouchers 
signed  by 

or  either  of  them,  and  we  confirm  the  V(  bal  instructions  to 
this  effect  already  given  to  you,  and  all  acts  done  by  you  in 
pursuance  thereof. 

Yours  truly. 


Figure  47 
JOINT  ArrorXT 


^U 


The  Manager 


THE 


BANK 


Dear  Sir: 

In  consideration  of  your  lending  money  to  the  undersigned  or  discounting 
for  ..r  taking  on  deposit  or  for  collection  or  otherwise  from  the  undersigned  bills 
..f  .xchange.  promissory  notes,  checks  or  other  securities  payable  at  points  at 
wln.h  there  is  no  branch  of  a  chartered  bank  of  Canada,  you  are  hereby  author- 
izi(i  to  forward  the  same  for  collection  to  any  National  Bank.  State  Bank 
private  banker  or  private  firm,  and  the  undersigned  hereby  undertakes  to  keep 
yuu  fully  indemnified  against  any  loss  arising  from  the  default  or  failure  of  any 
such  bank,  private  banker  or  private  firm  to  account  to  you  for  the  said  bills  of 
cxdiange.  promissor>-  notes,  checks  or  ether  securities  so  forwarded  or  for  any 
sum  or  sums  collected  on  account  thereof. 

The  undersigned  hereby  waives  every  presentment,  notice  of  dishonor 
and  protest  of  all  bills  of  exchange,  promissory  notes  and  checks  now  or  here- 
after drawn,  made  or  endorsed  by  the  unders  gned,  and  now  or  hereafter  de- 
posited with  or  delivered  to  you  for  collection  or  discount  or  as  security  or 
utl„Twisc.  The  undersigned,  to  avc  J  expense,  requests  you  not  to  protest 
siuli  bills  of  exchange,  promissory  notes  and  checks,  and  agrees  not  to  hold 
yoM  or  your  agents  liabe  for  not  presenting  or  protesting  or  giving  notice  of 
dMonor  of  the  same  and  to  become  and  remain  as  fully  liable  to  you  upon 
and  for  said  bills  of  exchange,  promissory  notes  and  chciks  as  if  its  present- 
ment, protest  and  notice  hereby  waived  were  duly  made  and  given. 

The  undersigned  herebj  authorizes  you  to  debit  the  account  of  the  under- 

Mpned  with  you  with  the  amount  of  any  bill  of  exchange,  promissory  note  or 

' l'<'  k  payable  at  your  offir.  and  which  may  be  no^v  or  hereafter  drawn,  made 

I  or  m repte,!  by  the  undeis.gned,  and  with  the  amount  of  any  bill  of  exchange 

proiiussory  note  or  check  which  having  been  previously  credited  to  the  said 

"",'.""  n'  T*"u"^  ^^  "'•'  ^'"'''  "^P"''''  ""•*  "^'^^  *"  "«'•''  '••"'^K^^  "nd  expenses 
.1^  !..■  Hank  shall  have  property  incurred  in  connection  therewith,  and  the 
>m. . TM^ni^l  agrees  to  repay  to  the  Bank  the  amount  so  debited  to  the  account 
ol  the  undersigned. 

The  above  shall  bind  the  successors  and  assigns  of  the  undersigned. 


I>  lied  at. 


the 


day  of 


19. 


FlGCRE  48 

WAIVER  OF  PROTEST 
213 


m 


u 


-g 


to 


■<«"  o 

o 


!^14 


H 


"'6 

irr 


216 


,ii 


II 


HANKING    PHACTICE 


wliosf  account  is  an  active  one.  In  every  case  of  cliaiv. 
mg  a  customer's  account  with  a  returned  or  dishonored 
bill  note  or  check,  the  ledger-keeper  should  immediatelv 
noti f y  the  customer  by  mail  of  the  dehit.  A  special  form 
'»(  advicc  IS  usually  used  for  this  jjurpose,  which  is  writ- 
ten m  du])licatc,  the  original  being  mailed  to  the  cus- 
tomer and  a  carbon  copy  used  as  a  voucher  to  be  charged 
to  the  account  (Figures  49  and  50) . 

Dishonored  bills,  acceptances  and  the  like  charged  to 
an  account  should  not  be  given  uj)  until  the  customer's 
check  has  been  received  therefor  or  the  account  verified 
and  the  usual  receipt  for  checks  and  vouchers  received 
If  there  are  not  sufficient  funds  in  an  account  to  re- 
tu-e  such  items  they  should  be  held  in  the  overdue  file 
until  provided  for. 

175.  The  ledger.— 1\  is  the  rule  in  most  banks  that  no 
entries  shall  be  made  in  any  ledger  bv  any  officer  other 
than  the  accredited  ledger-keeper.  aIi  entries  are  made 
from : 

(a)  Checks,  acceptances,  drafts,  notes,  etc.,  of  cus- 

tomers. 

(b)  Deposit  slips  initialed  by  the  teller. 

(c)  Debit  slips  for  items  charged  up,  etc.,  initialed 

by  the  manager  or  accountant. 

The  rules  regarding  loose-leaf  ledgers  should  be  care- 
fully followed  both  as  regards  the  current  account  ledg- 
ers and  savings  bank  ledgers.^  The  ledger-keeper 
should  watch  out  carefully  for  customers  having  the  same 
or  similar  names,  as  there  is  alwavs  the  danger  of  a  mis- 
take occurring  between  the  two  accounts.  In  such  case 
It  is  advisable  to  ])ut  a  warning  notation  on  the  account, 
as  uell  as  in  the  index,  so  as  to  attract  the  attention  of 

'See  Section  131. 


DEPOSIT    BUSINESS 


217 


..ny  one  looking  up  the  account.    All  indexing  should 
be  carefully  checked. 

17G.  Deiiosit  slips.— The  usual  form  of  deposit  slip  is 
shown  in  Figures  51  and  79.    The  deposit  slip  after  be- 
iiiK  checked,  stamped  and  initialed  by  the  teller  should  be 
lianded  by  him  direct  to  the  ledger-keeper.    The  latter 
slioiild  see  that  each  slip  has  been  initialed  and  stamped 
!)>•  the  teller;  he  should  then  post  the  credit  in  the  ledger 
iiiid  enter  the  amount  in  the  customer's  pass-book,  initial- 
ing the  entry.    At  the  same  time  he  should  enter  in  the 
pass-book  all  checks  which  have  been  charged  to  the 
account  since  the  book  was  last  presented  and  insert  the 
correct  balance  according  to  the  ledger.    No  blank  lines 
shoiihl  be  left  between  the  entries,  or  between  the  entries 
and  additions  of  the  debit  and  credit  columns. 

The  teller  should  not,  when  he  has  received  a  deposit, 
return  the  deposit  slip  to  the  customer,  that  he  may  hand 
it  to  the  ledger-keeper  for  entrj-  or  for  any  other  reason. 
To  do  so  would,  obviously,  be  dangerous. 

177.  3lone?/  received  after  hoiirs.—Frequentlv  money 
is  received  by  the  teller  too  late  in  the  afternoon  to  be 
entered  on  the  books  on  that  day.  In  that  case  it  is  the 
usual  rule  to  require  the  teller  to  enter  it  in  his  blotter 
for  the  following  day  and  hand  the  deposit  slip,  after 
initialing,  to  the  accountant,  who  will  have  it,  if  a  cus- 
tomer's deposit,  entered  in  the  ledger  at  once.  This 
piactice  is  followed  in  order  that  no  deposit  may  remain 
overnight  unrecorded  and  entirely  in  the  hands  of  one 
nificer. 

178.  Customers'  pass-hooks.— The  teller  should  not 
make  any  entry  in  the  pass-books  of  customers,  or  in 
any  of  the  books  of  the  bank  other  than  his  blotter  and 
itahuice  book. 

Pass-books  are  collected  from  customers  at  the  end 


« ''i;, 


1. 


i 


m 


THE  CANADIAN  BANK     THE  CANADIAN  BANK 
OF  COMMERCE  OF  COMMERCE 


CREDIT 

SAVINGS  BANK  DEPART 

Account  No 

MEr 

For  Credit  of 

DEPOSITED  BY 

Occupation 

Address 

OF        

191 

191 

X          1 

1 

X        1      - 

1 

X       2     = 

X       2     = 

X       4     = 

X       4     = 

X       5     = 

X        5     = 

X      10     = 

X     10     = 

X      20     = 

X     20     = 

X      50     = 

X     50     = 

<    100     = 

X    100     = 

Silver 

$ 

Checks 

$: 

$ 

FlGlHE 

51.     DEPOSIT  SLIPS 

218 

DKPosrr  nrsiNKSs 


^>ij) 


of  each  month  in  order  to  be  written  up  and  balanced  on 
the  last  day  of  the  month.  The  work  is  usually  done  on 
the  evening  of  the  last  day  of  the  month,  when  the  entire 
^tatt^  with  the  exception  of  the  teller,  assist  with  the  work 
ill  order  that  the  pass-books  nmy  be  ready  for  the  cus- 
tdiiieis  the  following  morning.  Although  the  teller  takes 
no  part  in  writing  up  and  balancing  customers'  pass- 
books, he  may  assist  in  comparing  the  checks  with  the 
entries  in  the  books  after  they  are  balanced.  The  man- 
a^ar  or  accountant,  provided  the  latter  does  not  also  act 
as  teller  or  ledger-keei)er,  afterward  compares  the  bal- 
ances in  tlie  pass-books  with  the  corresponding  balances 
in  the  ledger,  attesting  the  comparison  by  placing  his 
initials  opposite  the  balance  in  the  ledger,  and  against 
the  balance  carried  forward  in  the  pasy  *»«ok.  (See 
Section  250.) 

179.  Customers'  certification  of  accounts. — Each  bal- 
anced pass-book  when  delivered  to  a  customer  should  be 
accompanied  by  a  certificate  (Figure  52),  stating  the 
amount  of  the  balance  and  the  number  of  checks  re- 
turned. The  checks  may  be  returned  at  the  same  time 
if  the  customer  or  his  attorney  is  prepared  to  compare 
these  with  the  pass-book  and  sign  the  certificate  at  the 
bank  counter;  otherwise  the  certificate  should  be  signed 
and  returned  to  the  bank  l)efore  the  checks  are  sur- 
rendered. 

In  the  case  of  out-of-town  customers,  receipts  (Figure 
Vi)  should  be  obtained  before  the  checks  are  surrendered. 
It  may  be  necessary  to  make  exceptions  in  special  cases, 
when  vouchers  should  be  carefully  compared  with  the 
pass-book  or  copy  of  the  customer's  account  by  a  second 
officer  before  being  mailed,  so  that  in  event  of  a  loss  in 
transit  or  of  a  dispute  with  a  customer,  the  bank  may  be 
able  to  prove  that  the  vouchers  were  despatched.     In 


•n 


^2^20 


e 


00 


'iii 


BANKING    PHACTICE 


every  ease  in  which  checks  are  sent  out  l>efore  the  re- 
ceipt is  obtained  they  should  Iw  sent  by  registered  mull. 
iVI'ter  being  signed  the  certificates  should  be  checked  with 
the  ledger  by  the  manager  or  accountant,  who  should 
j)lace  his  initials  and  the  number  of  the  vouchers  op- 
l>osite  each  balance  in  the  ledger. 

If  the  accountant  acts  as  teller  or  ledger-keeper  this 
duty  should  l)e  performed  by  the  manager  oidy. 

The  certificates  should  be  filed  away  in  monthly  pack- 
ages in  such  order  as  to  be  easily  accessible  when  re- 
quired. As  this  certificate  is  equivalent  to  an  adjustment 
of  the  account  between  the  bank  and  its  customer,  it  is 
Aery  important  that  as  few  balances  as  possible  remain 
uncertified. 

180.  Guarding  against  fraud.— Fraud  has  been  per- 
petrated upon  employers  by  confidential  clerks  making 
false  entries  in  a  bank  pass-book,  or  by  keeping  a  spu- 
rious pass-book  for  the  eye  of  their  employers.  It  is  fully 
within  the  range  of  an  observant  officer's  power  to  de- 
tect embezzlement  attempted  by  such  methods  for  the 
safeguarding  of  the  bank  and  the  protection  of  its  clients. 
If  an  account,  operated  under  a  power  of  attorney,  or  by 
one  particular  employee,  is  frequently  overdrawn,  or  if 
there  occurs  anything  of  a  questionable  nature  in  the 
working  of  the  account,  the  circumstances  should  be  dis- 
creetly brought  to  the  notice  of  the  principal  by  the 
mana^^er. 

As  the  teller  comes  more  into  contact  with  the  public 
than  any  other  oflficer  he  has  exceptional  opportunities 
for  obser\'ing  things  which  may  be  of  great  use  to  the 
manager.  He  should  train  himself  to  observe  every  cir- 
cumstance connected  with  each  transaction,  and  espe- 
cially with  any  unusual  occurrence.  Any  attempt  at 
"kiting"  by  means  of  checks  should  be  reported  to  the 


DEPOSIT    BUSINESS 


as 


manager  at  once,  who  will  deal  with  it  as  he  may  con- 
sider advisable.  This  applies  also  to  accommodation 
checks,  and,  indeed,  anything  unusual  or  irregidar. 

ISI.  Certification  of  checks. — Checks  are  accepted  by 
tla-  Ie(l^er-keej)er  only  after  they  have  l)een  charged  to 
the  account  on  which  they  are  drawn.  Checks  should  not 
lit  marked  "good"  by  the  manager  or  any  other  officer 
iiiilt  ss  previously  debited  to  the  proper  account,  or  be 
iiossed  "Negotiable  at  par"  through  another  branch 
until  accepted. 

Xo  check  should  be  charged  to  an  account  unless  there 
are  funds  at  credit  to  meet  it,  without  the  authorization 
of  the  manager  signified  by  his  initials  on  the  check.  A 
check  which  has  been  altered  or  erased  in  any  vital  part 
should  be  refused.  Any  blank  space  in  the  amount 
should  be  distinctly  filled  in  or  the  customer's  attention 
called  to  it.  In  accepting  a  check  which  has  been  care- 
lessly filled  in  the  ledger-keeper  should  write  across  the 
i'ace  of  the  check  the  amount  for  which  he  has  accepted 
it.  so  that  it  cannot  be  "raised"  or  changed  to  a  larger 
amount. 

Ill  the  case  of  a  check,  for  which  there  are  funds,  being 
returned  for  some  informality  in  the  endorsement,  it 
should  be  "accepted"  before  being  sent  back  for  correc- 
tion. 

The  acceptance  stamp  should  be  closely  guarded  by 
the  ledger-keeper  during  the  day  and  invariably  locked 
lip  in  the  vault  at  night. 

\()  overdraft  should  be  allowed  without  the  permission 
•if  tlic  manager  expressed  in  writing  at  the  head  of  the 
account  or  by  his  initials  on  the  checks. 

Xo  check  should  be  refused  for  lack  of  funds  until  the 
balance  shown  in  the  ledger  has  been  proved  by  the 
addition  of  the  debit  and  credit  columns. 


^zu 


BANKING    I'HACTICE 


inv 


ill; 

mi 


;: 


t 


Attention  is  directed  to  the  serious  danorer  which  is  in- 
volved in  initialing  checks  which  creo "  ;  .erdraft,  and 
then  handing  them  back  to  the  customer  instead  of  to  the 
ledger-keeper  for  certification. 

182.  Cashing  checks.— Tellers  are  generally  forbidden 
to  cash  or  receive  on  deposit  unaccepted  checks  on  any 
bank,  or  any  drafts  or  other  items  unless  they  have  betli 
initialed  by  the  manager.  In  special  cases,  where  the 
manager  deems  it  necessary,  he  may  give  the  tellers 
written  authorization  to  accept  from  certain  customers 
checks,  drafts  and  items  to  a  specified  limit.  This  is  only 
done,  however,  when  the  undoubted  responsibility  of  the 
customers  justifies  this  action. 

The  possibility  of  being  victimized  by  confidential 
clerks  or  other  employees  of  the  bank's  customers  by 
means  of  forged  or  raised  checks  should  always  be  borne 
in  mind.  A  check  for  an  appreciably  larger  sum  than  is 
customary,  for  which  cash  is  demanded  in  payment,  is 
in  itself  significant  and  should  excite  suspicion.  A  checii 
drawn  payable  to  the  customer  of  another  bank  should, 
in  the  ordinary  course  of  business,  be  presented  through 
the  other  bank,  and  such  a  check,  even  if  payable  to 
bearer,  presented  over  the  counter  for  cash  should  carry 
suspicion  on  its  face  and  suggest  inquiry. 

It  should  always  be  borne  in  mind  by  the  teller  that 
accepted  checks,  bank  drafts,  express  orders  and  circular 
letters  of  credit  are  also  all  liable  to  forgery  and  altera- 
tion ;  payments  made  on  the  latter,  especially  to  stran- 
gers, should  be  limited  to  a  reasonable  amount  for  travel- 
ing requirements.  If  they  call  for  a  large  amount  great 
care  should  be  exercised. 

Checks  payable  to  corporations  or  wholesale  firms 
should  not  lye  paid  over  the  counter  to  an  employee  with- 

1  to  the  bank  by  the  company  or  firm. 


sane 


DEPOSIT    BUSINESS 


2!2J 


Checks  should  not  be  cashed  for  strangers  until  they 
have  l)een  satisfactorily  identified;  even  then,  there  is 
not,  as  a  rule,  much  profit  to  a  bank  in  the  transaction. 

Xo  identification  is  ?afe  or  satisfactory  excepting  the 
attendance  at  the  bank  of  a  well-known  and  responsible 
l)erson,  who  endorses  the  check  or  other  instrument  in 
the  presence  of  an  officer  of  the  bank.  Any  other  osten- 
sible identification  or  endorsement  may  be  fraudulent. 
A  person  who  forges  the  signature  to  a  check,  or  raises 
the  amount  of  a  draft,  or  steals  any  negotiable  instru- 
ment, might  be  presumed  also  to  forge  a  letter  of  iden- 
tification or  an  endorsement,  to  serve  the  purpose  of 
identification.  The  safest  course  is  always  to  give  the 
bank  the  benefit  of  the  doubt. 

A  written  identification  which  purports  to  be  that  of 
an  hotel-keeper  or  hotel  clerk  is  especially  open  to 
suspicion. 

Every  check  for  a  i.  xge  sum  should  be  particularly 
scrutinized,  and  the  attention  of  tli^  manager  called  to  it. 

Customers  or  others  who  are  unable  to  write  and  who 
sijfn  by  mark  on  checks  or  other  documents,  should  be 
identified  to  the  satisfaction  of  the  teller,  but  in  no  case 
should  the  teller  witness  the  mark,  which  should  be  at- 
tested by  an  independent  witness,  not  an  officer  of  the 
bank. 

183.  Method  of  filing  checks  and  deposit  slips. — 
Checks  and  deposit  slips  should  be  filed  away  by  the 
led^rer-keeper  daily.  The  checks  of  each  customer  should 
be  filed  separately  in  the  order  in  which  they  are  entered, 
for  ready  comparison  with  the  ledger  or  pass-book.  The 
deposit  slips  should  be  filed  in  alphabetical  order  each 
day  and  in  chronological  sequence. 

ISJ'.  Savings  bank  department. — The  rules  to  be  ob- 
served with  respect  to  the  current  account  ledger  are 

C-VI 11—14 


^ 


I    ■  1 


2£6 


BANKING    PRACTICE 


I 

I 


applicable  to  the  savings  bank  ledger,  with  the  follow- 
ing exceptions: 

The  manager  should  take  charge  of  and  keep  under 
lock  and  key  ali  h^ank  savings  bank  pass-books,  and 
issue  them  to  the  ledger-keeper  in  unnumbered  lots  of 
one  or  two  dozen,  as  he  may  think  best,  keeping  a  record 
thereof  and  verifying  them  according  to  the  new  num- 
bers when  checking  the  ledger  entries  with  the  supple- 
mentary cash  book.  Should  it  be  necessarj'  to  issue  a 
new  book  in  continuation  of  an  old  account  the  ledger- 
keeper  should  then  and  there  draw  the  manager's  or 
accoimtant's  attention  thereto.  By  this  method  it  is  in- 
tended that  the  manager  should  personally  know  that 
no  deposit  is  received  for  a  new  account  without  a  cor- 
responding credit  to  the  ledger. 

The  savings  bank  pass-book  should  be  presented  when 
withdrawals  are  desired  so  that  the  entry  can  be  made 
in  the  book  itself.  Whenever  it  is  necessary  to  make  an 
exception  to  this  rule  there  should  be  no  question  as  to 
the  dejwsitor's  identity,  and  the  manager  should  initial 
the  check,  making  note  of  any  particulars,  especially  the 
name  and  address  of  any  outside  party  called  in  for  iden- 
tification. 

When  a  savings  bank  account  is  closed  the  pass-book 
should  be  returned  and  written  up  in  full  with  a  heavy 
line  ruled  across  the  page  under  the  last  entry,  and  filed 
away  by  the  ledger-keeper  in  a  box  provided  for  the 
purpose.  All  pass-books  so  retained  should  be  sorted  in 
numerical  order  so  that  they  may  be  readily  accessible. 

Should  a  customer  reopen  an  account,  however,  it 
should  be  under  a  new  number  and  book;  the  old  book 
should  never  be  "eissued. 

185.  Duplicate  pass-hookft. — Where  the  identification 
of  the  depositor  is  without  question,  and  the  manager  is 


DEPOSIT    BUSINESS 


227 


fully  satisfied  that  the  pass-book  has  been  lost,  the  bal- 
ance of  the  account  should  be  withdrawn  by  check  and  a 
new  account  opened  with  a  book  under  a  new  number. 
A  incniorandum  should  be  made  on  the  old  account  in 
the  ledpfcr,  giving  the  circumstances  of  the  case. 

18(1.  Interest  on  savings  bank  accounts. — Interest 
on  accounts  in  the  savings  bank  department  is  credited 
to  the  accounts  every  six  months.  The  interest  should  be 
coniputed  by  the  ledger-keeper  and  checked  by  a  senior 
officer  before  adding  the  amount  to  the  balance.  The 
debit  slip  to  discount  and  interest  should  be  initialed  by 
both  officers. 

Savings  bank  accounts  which  become  unduly  active 
are  not  worth  3  per  cent  interest  and  should  be  trans- 
ferred to  the  ordinary  deposit  ledger,  but  only  by  au- 
thorization of  the  manager.  As  a  general  rule,  two  or 
thiee  cheeks  per  month  should  be  the  limit,  though  com- 
|)etition  may  render  inadvisable  a  too  strict  interpreta- 
tion of  this  rule. 


fl 


CHAPTER   VI 


LOANING    A    BANK'S    MONEY 


187.  Experience  the  only  teacher. — David  Hariim's 
definition  of  banking,  "Loaning  your  money  and  gettin' 
it  back,"  presents  the  gist  of  this  chapter  in  a  few  words. 

A  bank  must  naturally  expect  to  make  some  losses  in 
its  business,  but  discrimination  in  making  loans  will  re- 
duce these  losses  to  a  minimum.  The  avoidance  of  losses 
is  seldom  a  matter  of  good  fortune,  but  rather  of  good 
judgment,  and  the  time  to  avoid  a  bad  debt  is  when  the 
paper  is  offered  for  discount. 

The  ability  to  recognize  the  difference  between  a  good 
loan  and  a  poor  one  cannot  be  acquired  from  books  or 
even  from  personal  teaching;  it  can  only  be  gained  from 
experience  supplemented  by  other  necessary  qualifica- 
tions. True,  there  are  certain  fundamental  principles 
to  observe  in  analyzing  any  account,  but,  outside  of 
these,  no  two  accounts  can  be  judged  exactly  alike;  con- 
ditions are  too  varied. 

Certain  qualifications  are  essential  to  a  manager  in 
loaning  money.  He  must  be  a  man  of  pleasing  address, 
able  to  meet  with  and  draw  out  from  men  the  informa- 
tion he  desires,  and  above  all  must  be  able  to  say  no 
without  giving  undue  offense.  He  should  have  a  fair 
knowledge  of  accounting,  so  as  to  be  able  to  read  be- 
tween the  lines  of  a  statement,  or  detect  a  discrepancy. 
He  should  have  a  good  memory,  supplemented  by  a 
record  of  all  essential  information  obtained  verbally 
from  a  customer.    As  a  rule,  it  is  bad  policy  to  take  notes 

228 


LOANING    A    BANK'S    MONEY 


239 


(luring  a  conversation,  as  it  is  likely  to  restrain  a  cus- 
toiiar  I'roni  ifiving  information  freely. 

Credit  has  been  defined  as  "A  question  of  ability  to 
pay  coupled  with  an  intention  to  pay."  Both  ability  and 
iiitdition  must  be  assured  in  order  that  the  loan  may  be 
considered  a  safe  proposition;  the  latter  of  these  requi- 
sites is  one  that  must  be  settled  on  the  basis  of  past  ex- 
||  v-iice,  habits  of  life,  character,  and  the  like.  If  a  man 
liiis  always  paid  his  debts  and  is  not  living  beyond  his 
means,  his  intention  to  pay  would  be  practically  assured. 
i'lic  ability  to  pay,  however,  is  another  matter  and  much 
iiKirc  difficult  to  determine. 

Tlicre  are  therefore  certain  facts  that  a  manager  must 
know  in  order  to  determine  whether  or  not  the  bank  will 
ill-  willing  to  extend  credit  to  a  borrower: 

(1)  ^Intecedent  and  character  of  a  borrower. 

( 2 )  Nature  of  the  business. 

(3)  Organization. 

(4)  Competition. 

{ 5 )   Business  methods. 
((>)   Outside  opinion. 
(7)   Net  worth. 

1(1  addition  to  this  general  information  the  manager 

should  know  what  kind  of  transaction  every  piece  of 

l)ai)cr  discounted  by  him  represents,  and  should  make  a 

practice  of  putting  the  following  questions  to  himself: 

1 .  For  what  purpose  is  the  bank's  money  to  be  used  ? 

'2.  Is  the  loan  safe:  would  I  len    my  own  money  on 

the  security  offered? 
*).  Is  it  a  transaction  that  the  bank  should  undertake 

or  can  legally  or  morally  become  a  party  to? 
i.  Will  the  money  be  used  for  the  purpose  it  is  osten- 
sibly borrowed  for? 


230 


BANKING   PRACTICE 


5.  Will  the  paper  be  met  at  maturity,  and  from  what 

source  ? 

6.  Would  the  endorser  be  able  to  pay  the  amount,  if 

called  upon  to  do  so,  without  seriously  impairing 
his  means? 

To  sum  up,  is  the  transaction  a  good  banking  prop- 
osition?  If  all  these  questions  can  be  answered  satisfac- 
torily, and  are  corroborated  by  an  analysis  of  the  bor- 
rower's statement,  the  manager  is  in  a  position  to  dis- 
count the  paper  if  within  his  discretionary  limits,  or 
otherwise  to  recommend  the  loan  to  tlie  head  office  for 
authorization. 

A  simple  rule  is:  never  give  out  the  bank's  money 
without  having  rational  or  common  sense  reasons  for 
knowing  that  it  can  be  repaid  within  a  reasonable  time. 
It  is  the  first  principle  of  banking  science  that  money 
must  not  be  locked  up  in  land,  buildings,  mines  or  similar 
non-banking  ventures,  or  so  loaned  that  it  can  only  be 
paid  out  of  future  profits  or  by  being  transferred  to 
another  bank. 

188.  Causes  of  failure  in  business. — A  study  of  the 
principal  causes  of  business  failures  may  be  useful  in 
demonstrating  the  relative  importance  of  the  various  fac- 
tors of  weakness.  The  accumulated  experience  of  many 
years  has  been  shown  by  Bradstreet's  to  prove  that  a 
large  number  of  failures  occur  because  of  deficiencies  in 
the  traders  themselves,  rather  than  because  of  happen- 
ings beyond  their  immediate  control.  In  Bradstreet's 
Journal  for  January  25,  1912,  eight  leading  causes 
were  grouped  under  the  first  heading,  while  only  three 
were  given  as  existing  apart  from  the  individual  them- 
selves. These  causes  are  as  follows  in  the  order  of  their 
importance: 


LOANING    A    BANK'S   MONEY 


231 


A.— Due  to  faults  of  those  failing: 

1.  Lack  of  capital. 

2.  Incompetence  (irrespective  of  other  causes). 

4.  Fraudulent  disposition  of  property. 

5.  Inexperience  (without  other  incompetence). 

6.  Neglect  of  business  (due  to  doubtful  habits) . 

7.  Unwise  granting  of  credits. 

10.  Personal  extravagance. 

1 1 .  Speculation  ( outside  of  regular  business ) . 
B.— .Yof  due  to  faults  of  those  failing: 

3.  Specific  conditions  (disaster,  prolonged  sick- 

ness, etc. ) . 

8.  Competition. 

9.  Failure  of  others  (of  apparently  solvent  debt- 

ors). 
In  1912,  30.3  per  cent  of  the  number  and  80  per  cent 
of  the  liabilities  were  due  to  the  shortcomings  of  those 
who  failed.    Bradstreet's  gives  the  following  interesting 

table: 

PERCENTAGES  OF  DUMBER  OF  FAILURES  AND  LIABILITIES 
IN  THE  UNITED  SFATES  AND  CANADA  IN  1911  AND  1912 

C.A88IFIED   AS   TO   CxCSEa 


United  States,  Per  Cent 

Canada, 

Per  Cent 

Failures  Due  to 

Number 

Liabilities 

Number 

Liabilities 

1912  1  1911 

1912 

1911 

1912 

1911 

1912  i  1911 

l.;i(k  of  capital 

Iiudiiipetence 

Spteitic  condition.s. 
Fraud 

20  7      314 

:jo  2     27  0 

10  5      10  9 

10  3  .   10  0 

4  0        4  1 

20       22 

2.0       2.0 

1.9  ,     2.9 

13        1.3 

.7          .9 

.8          .7 

33  5 

20  8 

13  8 

8  8 

3  0 
10 
2  6 
13 

4  » 
.9 

3.4 

28.3 
23  5 
20.7 
8.9 
2  2 
13 
2  2 
4.8 
4  2 
12 
2.7 

50.3 

16.3 

12.8 

6.7 

5.1 

4  3 

13 

10 

.9 

.8 

.5 

49.3 

16  1 

14  6 

8  1 

2.9 

4.1 

.9 

11 

11 

.9 

.9 

45.8 

22  8 

8.8 

10  3 

3  5 

3.1 

1.7 

.6 

2  5 

.5 

.4 

47  8 

18  9 

10  1 

9.9 

1.5 

2.5 

I  mvise  credits 

CcmiiK'tition 

Failures  of  others 

Extravagance 

Speculation 

10 
.6 
1.4 
3.2 
31 

232 


RANKING    PRACTICE 


These  i)eiccj«tages  afford  imicli  interesting  and  in- 
structive information  and  point  deHnitely  to  the  more 
serious  ills  of  commercial  life. 

It  is  at  once  apparent  that  the  most  dangerous  factor 
in  Canadian  business  life  is  the  lack  of  capital,  which  is 
responsible  for  over  50  per  cent  of  the  business  failures. 
The  lack  of  liquid  capital  is  one  of  the  most  serious  diffi- 
culties a  bank  manager  has  to  contend  with,  and  he  must 
ever  be  on  the  alert  for  its  appearance.    It  is  a  condition 
which  may  arise  at  any  time.    For  instance,  a  loan  made 
to  a  customer  ostensibly  for  the  creation  of  liquid  assets 
may  be  improperly  diverted  into  building,  real  estate  or 
other  fixed  assets.     Lack  of  capital,  although  the  ap- 
parent cause  of  these  failures,  is  not  necessarily  the 
primary  condition,  but  may  arise  or  be  aggravated  by 
any  of  the  other  causes:  injudicious  buying,  for  instance, 
extravagance  in  li\  ing,  or  speculation,  may  all  result  in 
this  condition,  without  showing  as  an  apparent  factor  in 
the  failure. 

Incompetence  shows  the  next  largest  percentage  in 
Canada,  and  combined  with  inexperience  gives  a  total  of 
21.4  per  cent  in  number  and  26.3  p^r  cent  in  liabilities. 
These  particular  causes  assert  themselves  in  various 
Mays:    injudicious  buying,  lack  of  organization,  and 
other  unw'se  business  transactions.     It  musi  be  borne 
in  mind  that  a  man  may  be  most  successful  in  operat- 
ing a   small   business,  but  may  j)rove  quite  unfit  to 
handle  a  larger  one,  on  account  of  lack  of  business 
education. 

The  other  causes  are  self-evident  reasons  for  non- 
success  in  business  and  call  for  no  particular  comment. 
It  is  not  only  r  cessary  to  keep  these  causes  of  failures 
constantly  in  mind,  but  it  is  advisable  also  to  watch  care- 
fully that  the  presence  in  an  account  of  the  least  im- 


LOANING    A    BANK'S    MONEY 


23S 


jM)rtaiice  does  not  itself  assume  larger  proportions,  or 
induce  even  more  serious  conditions. 

181).  Statement  of  affairs. — Reference  has  already 
l)een  made  to  the  necessity  for  obtaining  a  knowledge 
of  a  borrower's  net  worth.  This  information  is  arrived 
at  by  an  analysis  of  the  business  statement,  which  is  re- 
quired from  all  customers  seeking  credit  from  a  bank. 

Although  the  practice  of  requiring  statements  from 
borro^Ning  customers  is  by  no  means  an  innovation  on 
the  part  of  banks,  it  is  only  of  late  years  that  it  has  been 
found  advisable  to  make  the  rendering  of  a  statement 
an  invariable  condition  of  lending  a  bank's  money.  This 
necessity  is  due  to  several  causes;  one  is  the  rapid  ex- 
l)ansion  of  the  country  and  the  opening  up  of  branches 
in  new  territories;  another  is  the  gradual  elimination  of 
the  personal  element  in  modern  business  life,  due  to  the 
incorporation  of  old-established  firms  into  joint  stock 
companies,  a  shareholder  in  which  has  only  the  amount 
of  his  investment  in  the  company  at  stake,  and  not  his 
whole  fortune  and  the  honor  of  the  family  name.  The 
principal  reason,  however,  is  no  doubt  a  response  to  the 
constant  demand  for  efficiency  and  thoroughness  in  all 
hranches  of  business  life,  and  the  granting  of  commercial 
credits,  as  the  keystone  of  the  whole  structure,  has  been 
raised  almost  to  the  dignity  of  a  profession.  The  ex- 
cellent work  accomplished  by  the  various  credit  men's 
associations  in  the  United  States  ^  has  naturally  extended 
its  influence  to  Canada,  and  practically  every  business 


'  Much  credit  is  due  to  Mr.  James  G.  Cannon,  President  of  the  'ourth  National 
Bank  of  New  York,  to  whose  unremitting  efforts  in  arousing  public  interest  in  this 
qul'^ti()[|  iiHiy  be  ascribed  the  present  high  standard  of  credit  requirements  in  the 
comHitni:'.!  wiirld.  Mr.  (^mnon  is  the  author  of  many  intorpsting  and  exhaustive 
articles  and  addresses  on  the  subject  of  commercial  credit,  and  he  was  instrumental 
in  liuving  the  banks  and  credit  aiisoeiations  throughout  the  United  States  adopt 
i  uiiif(jrm  statement  blank. 


Il 


234 


BANKING    PRACTICE 


fe 


house  of  any  importjuice  has  its  own  credit  department 
doing  invaluable  work.' 

In  analyzing  a  statement  it  is  well  to  bear  in  mind  the 
old  saying  that  "A  man  tells  his  hopes  to  his  banker  and 
his  fears  to  his  lawyer,"  and  further,  that  a  statement  of 
affairs  is  often  an  expression  of  opinion  rather  than  a 
statement  of  facts. 

In  the  course  of  one  of  his  addresses  on  "Bank 
Credits,"  Mr.  Cannon,  in  an  interesting  and  instructive 
way,  remarks  on  the  necessity  of  an  analyzed  statement 
in  loaning  money : 

The  cornerstone  of  credit  may  be  said  to  be  the  requiring 
from  borrowers  of  statements  of  the  condition  of  their  affairs. 
This  has  now  become  an  accepted  custom  in  the  relation  be- 
twicn  banks  and  borrowers  on  commercial  paper.  It  has  come 
to  be  recognized  that  the  practice  is  of  value  to  both  the  bank 
and  the  borrower,  and  this  may  be  considered  the  reason  for 
its  success.  Furthermore,  the  making  of  statements  often- 
times renders  concerns  themselves  aware  of  their  weaknesses  in 
their  methods  of  operation,  financial  practices  and  results  of 
business.  The  banker,  having  a  substantial  interest  in  the 
success  of  the  customer,  may  frequently  give  wholesome  advice 
or  timely  warning  from  his  wide  experience  in  commercial  affairs 
and  his  foresight  in  monetary  matters. 

A  statement,  however,  which  is  not  submitted  to  analysis 
is  a  menace.  Because,  first,  if  errors  have  been  made,  if  lack 
of  judgment  on  the  part  of  the  management  of  the  concern  has 
been  shown  which  is  not  brought  to  the  attention  of  the  bor- 
rower, if  reckless  methods  have  been  indulged  in  or  any  dis- 
honesty has  been  practised,  the  very  fact  that  a  statement  has 
been  received  and  accepted  by  a  banker  either  lulls  into  a 
sense  of  security  the  careless  or  heedless  borrower,  confirms  the 
reckless  financial  habit  or  establishes  the  dishonesty,  if  such 

"  The  Canadian  Credit  Men's  Asscciation,  although  only  sUrted  in  Winnipeg 
in  1910.  has  extended  its  organization  throughout  Canada  and  has  already  accaoi- 
plishi'd  much  excellent  work. 


LOANING    A    BANK'S    MONEY 


885 


lAi'ts.  Frank  uiui  open  Ntntenients,  lionring  upon  their  fare 
the  tvulence  of  a  true  condition  of  afTuirs,  are  the  greatest 
fai  tors  in  establishing  credit.  Nothing  will  more  firmly  cement 
thf  union  bitwoen  borrower  and  banker  than  such  a  statement, 
iiK*  nothing  will  be  of  more  value  to  a  banker  and  of  less  harm 
to  tin  honest,  enterprising  borrower.  Hidden  facts  are  re- 
vt:ili(l  by  analysis,  and  skill  in  reading  between  the  lines  is  an 
Important  part  of  a  manager's  training.  By  this  means,  weak- 
iitNxs  may  freijuently  be  discovered  and  proper  steps  taken  to 
a\crt  trouble  before  acute  difficult \    irises. 

A  large  number  of  statements  will  show  on  their  face  such 
cviik-nce  of  weakness  as  to  require  no  further  investigation. 
Tills  information,  of  course,  is  valuable  to  bankers,  and  they 
will  at  once  decline  to  extend  these  applicants  any  accommoda- 
tion; whereas,  if,  on  the  other  hand  they  were  only  in  possession 
of  Indefinite  data,  they  might  be  disposed  to  extend  a  line  of 
cndit. 

Many  old  firms,  because  they  have  been  in  the  habit  of  con- 
ilinting  their  business  without  revealing  their  financial  affairs 
to  any  one,  feel  a  natural  reluctance  to  making  a  statement  of 
thtir  condition;  but  we  should  bear  in  mind  the  fact  that  great 
and  deplorable  mistakes  have  been  made  by  banks  in  granting 
l.irtfc  lines  of  credit  to  old  houses  simply  because  they  had  an 
uiiliit  nilshcd  record  and  were  supposed  to  be  entitled  to  liberal 
consideration. 

Notis,  bills,  drafts,  checks,  book  credits,  or  any  form  of 
ohlifrjition  resulting  from  a  credit  transaction,  come  into  exist- 
ence, not  antecedent  to,  but  as  a  consequence  of,  a  transfer  of 
floods  involving  futurity.  Paper  is  purely  fictitious  and  ille- 
gitimate which  is  not  the  outcome  of  an  operation  in  goods; 
aiui  \vc  are  enabled  to  test  whether  loans  are  legitimate  or  not 
according  as  we  know  whether  the  discounts  are  granted  or  not 
for  actual  transfers  of  salable  goods.  This  test  gives  us  the 
means  of  drawing  the  line  between  sound  and  unsound  banking-. 

Tlie  manager  as  a  rule  trusts  too  much  to  his  customer— 
'f  the  latter  wants  money,  presumably  he  is  an  ordinarily  pru- 
dint  man,  and  knows  what  to  do  with  it ;  he  must  know  liis  own 


-, 


236 


BANKING    PRACTICE 


I 


,  : 


li 


u 

hi 


business  better  than  his  banker,  un<l  it  would  \k  presumptuous 
in  the  latter  to  undertake  to  guide  him.  While  this  may  be 
true  of  the  well-trained  and  experienced  merchant,  it  is  virv 
wi<le  of  the  truth  with  hundreds  of  traders  and  small  manu- 
facturers all  over  the  country.  There  are  really  very  few  nun 
anywhere  who  can  be  trusted  to  handle  pnujently  and  safeh' 
unstinted  loans  of  money.  The  proverl)  "(Jive  him  rope  enough 
and  he  will  hang  himself  fitly  illustrates  the  tendency  of  the 
average  trader  to  get  into  difficulty  when  he  is  too  freely  pro- 
vided with  money. 

The  trader,  as  a  general  rule,  seems  to  have  hut  one  idea, 
namely,  to  <lo  a  large  business,  and  to  keep  on  increasing  it. 
His  whole  energy  is  given  to  the  increase  of  his  sales,  without 
much  reference  to  the  risk  he  runs  from  accumulation  of  slock, 
over-production,  or  foolish  credits.  And  if  he  will  not  regard 
these  aspects  of  his  own  business,  how  can  he  be  expected  to  take 
notice  of  the  fact  that  his  neighbors  and  competitors  are  doing 
precisely  the  same  thing,  and  that  a  general  inflation  is  immi- 
nent? It  is  obvious  that  if  you  have  many  such  men  in  tlie 
community  it  cannot  take  very  long  to  produce  a  commercial 
depression  and  widespread  failure,  especially  if  the  bankers  who 
are  supplying  the  money  for  this  mad  race  have  no  more 
insight  or  foresight  than  their  customers. 

With  careful  and  prudent  banking,  however,  much  of  the 
mischief  would  be  prevented.  Inflation  is  seldom  developed  to 
a  very  great  extent  without  accommodation  loans,  and  these 
would  be  very  sparingly  indulged  in  if  not  altogether  avoided. 
Creilits  would  be  carefully  scanned  and  risks  divided;  ami 
so  the  skillful  banker,  by  simply  following  safe  rules  In  his  own 
business — rejecting  here  and  encouraging  there — cannot  help 
saving  his  customers  as  well  as  himself  from  much  trouble  and 
loss.  But  in  order  to  do  this  well  he  must  be  a  man  who 
thoroughly  knows  his  business;  of  strong  self-reliance,  a  man 
who  arrives  at  his  opinions  and  judgments  from  obser%ed  facts, 
not  from  liearsay,  and  who  is  not  to  bo  friglitened  into  altering 
his  course  to  suit  importunate  and  perhaps  influential  borrowers. 


LOANING    A    BANK'S    MONEY 


887 


VM).  Scirncc  of  credit. — The  following  analysis  of 
till-  jirinciplcs  and  rules  which  govern  a  credit  man  in  his 
work  are  suggested  by  Mr.  Cannon: 

ri{iNciPi,Es: 
1.  To  reduce  losses. 
•J.  To  eliminate  disproportionate  risks. 
a.  To  conserve  worthy  interests. 
4.  To  war  on  dishonesty  and  incompetence. 

.^rUHANISM: 

1.  The  statement  of  condition,  including: 

Assets  and  liabilities. 
Annual  business  or  turnover. 
Net  result  of  business. 
Bad  debts. 
Commercial  expenses. 
Character  and  antecedents. 
Special  trade  conditions. 

2.  The  analysis  and  study  of  the  above. 

(;i  iDiN'o  rules: 


1.  Quick  assets  only  are  a  basis  for  loans. 

2.  Fixed  assets  only  considered  as  giving  an  un- 
known support  to  the  quick  assets. 

3.  The  debt  limit  of  the  borrower  has  been  exceeded 
when  his  liabilities  exceed  50  per  cent  of  his 
quick  assets  (the  so-called  50  per  cent  credit 
rule). 

4.  It  should  always  be  borne  in  mind  that  there  is 
a  cardinal  difference  between  banking  credit  and 
other  kinds  of  commercial  credit ;  you  can  afford 
to  run  much  less  risk  in  banking  than  in  com- 
merce and  therefore  you  must  take  much  greater 
precautions. 


>    H: 


M:|fti. 


y 


238 


HANKING    rUACTICE 


V^\.  Form  of  st(,tcmcut,—A\\.ho\xf^h  for  many  rea- 
sons it  is  prcfcnihlf  to  have  a  statement  rendered  on  one 
of  the  standard  I'orms  sni)i)ned  hy  a  hank,  the  main 
ohjeet  is  to  ohtain  information,  and  frecpiently  a  statc- 
nient  made  up  l)y  a  customer  along  his  own  lities  may 
(hselose  weakness  whieh  a  more  formal  statemen'  might 
not  reveal.  Fi^nnv  .34  is  a  comprehensive  form  eomhiii- 
inn-  both  a  statement  and  an  application,  and  is  adapted 
to  the  statements  of  private  individuals,  firms  and  cor- 
porations. It  will  he  noted  that  each  partner  of  p.  firm 
is  mpiircd  to  sign  the  statement  and  ai)plieation. 

The  statement  generally  submitted  to  a  bank  is  the 
amnial  statement  of  the  customer's  affairs.  This  should 
he  made  at  the  end  of  his  fiscal  year,  when  his  merchan- 
dise and  raw  material  accounts  are  at  their  lowest,  and 
his  bank  loans  cleaned  up. 

In  any  husiness  there  should  be  at  least  one  period  in 
the  year  when  the  direct  uulebtedness  to  the  hank  is  fully 
l)aid  up.  This  is  of  vital  importance  both  to  the  bank 
and  the  customer.  Tiider  nornml  co?iditions  inability 
to  clean  up  liank  loans  annually  points  to  a  lack  of 
working  capital,  which  may  be  due  either  to  the  gradual 
change  of  (piick  assets  into  fixed  assets,  or  to  injudi- 
cious buying  or  selling.  To  allow  this  condition  to  be- 
come chronic  is  fatal ;  it  should  be  remembered  that  Sn 
per  cent  of  the  failures  in  Canada  are  due  to  Jack  of 
capital. 

A  brief  comment  on  the  information  called  for  hy  the 
statf-mcnt  shown  in  Figure  ,54  wiil  be  instructive".  It 
must  first  lie  noted  that  what  are  called  "quick  assets" 
consist  of  cash,  receiva!)les  and  merchandise,  while  "cur- 
rent liabilities"  include  practically  all  indebtedness  ex- 
cept mortgages.  The  ratio  of  liabilities  to  quick  assets 
is  usually  the  first  test  of  the  statement.    The  two  totals 


LOANING    A   BANK'S    MONEY 


239 


are  therefore  in  line  with  each  other  for  purposes  of 
(|uick  comparison.  Except  in  certain  businesses  such  as 
lumber,  grain,  or  otb  staples,  tlie  liabilities  should  not 
exceed  50  i)er  cent  i  lie  quick  assets,  and  as  a  rule 
the  former  should  not  exceed  the  cash  and  receivables, 
tiiiis  leaving  the  amount  of  merchandise  on  hand  to  rep- 
resent working  capital. 

192.  Cash. — The  cash  on  hand  should  always  be  of 
comparatively  small  amount.  If  large,  the  reason  should 
he  iiKjuired  into,  as  this  means  either  carelessness  in 
tiiiaiicing  or  that  some  worthless  note  or  hon  is  carried 
as  cash.  Practically  all  the  cash  on  hand  should  be  car- 
ried in  the  bank,  and  the  balance  maintained  should  be 
commensurate  with  the  amount  of  work  which  the  ac- 
coimt  involves  to  the  bank. 

Comparison  should  be  made  with  the  bank  ledger  on 
the  same  date,  and  if  outstanding  checks  have  been 
allowed  for  by  an  entry  on  the  liability  side  of  the  state- 
ment, the  amount  should  agree,  otherwise  the  deposit 
led^rer  balance  will  be  the  larger;  if  the  reverse,  the  rea- 
son should  be  inquired  into. 

lO.'J.  Merchandise. — Stock  on  hand  or  merchandise 
calls  for  most  careful  consideration  and  analysis.  Old 
and  unsalable  stock  accumulates  rapidly,  especially  under 
poor  management,  and  even  if  the  stock  is  reasonably 
lieu,  its  amount,  if  out  of  proportion  to  the  total  sales, 
may  l)e  a  burden  to  the  business  and  prove  a  source  of 
weakness.  It  is  important  to  know  if  the  figures  are  the 
rcsidt  of  actual  inventory  at  cost  price,  and  also  on  what 
hasis  old  or  unsalable  goods  have  been  included.  In 
re\aluing  the  merchandise  for  credit  purposes  due  con- 
sideration must  be  given  to  the  nature  of  the  business. 
A  di(hiction  of  10  per  cent  is  generally  sufficient  for 
staples  such  as  groceries,  provisions,  iron,  and  leather. 


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244 


BANKINCi    I'HACTICE 


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uhile  on  goods  partaking  of  the  nature  of  luxuries,  or 
depending  for  their  sale  on  changing  fashions  or  sea- 
sons, there  should  he  a  much  heavier  discount.  It  is 
always  advisahle  to  look  over  the  stock  as  occasion  offers. 
Another  good  plan  is  to  keep  a  record  of  the  result  of 
local  Jiquidation  sales  of  goods  and  receivahles;  no  bet- 
ter ohject  lesson  can  be  found  as  to  the  realizable  values 
of  different  kinds  of  merchandise. 

In  a  manufacturing  business  it  is  necessary  to  know 
the  several  values  of  raw  materials,  finished  goods  and 
goods  in  process  of  manufacture.    Raw  material  if  not 
too  much  broken  in  bulk  is   worth   within   10  or  1.5 
per  cent  of  the  cost.    Finished  goods,  if  ready  for  ship- 
ment, should  be  worth  actual  manufacturing  cost,  but 
unfinished  goods  should  only  be  considered  to  the  extent 
of  the  goods  actually  in  process  of  manufacture,  as  es- 
tablished by  the  ratio  between  the  daily  and  total  an- 
nual output.    Any  balance  over  this  amount  should  In- 
inquired  into,  as  under  this  heading  are  often  inventoried 
parts  of  articles  whose  manufacture  has  been  discontin- 
ued.   For  instance,  se\  cral  years  ago  a  carriage  factory 
prepared  for  a  large  output  of  a  special  make  of  sleighs. 
The  winter  that  year  was  mild,  and  oidv  a  few  were  sold. 
and  the  following  year  there  was  practically  no  demand 
for  this  particular  style  of  sleigh,  and  the  few  manufac- 
tured ones  left  were  disposed  of  with  difficulty.    The 
company  had  very  foolishly  prepared  a  large  number 
of  parts  in  anticipation  of  heavy  sales,  and  these  were 
carried  at  cost  price  in  the  inventory  as  unfinished  goods 
for  a  number  of  years.    The  company  was  finally  liqui- 
dated ;  the  wooden  parts  were  used  for  firewood  and  the 
hardware  scrapped. 

The  amount  of  merchandise  in  a  business  should  form 
a  reasonable  proportion  of  the  amiual  turnover.    Con- 


LOANINC,    A    HANK'S    MONEY 


S45 


(litinns  vary  in  different  trades  and  localities,  and  it  is 
iiii|)()s.sil)le  to  establish  any  standard.  Roughly  s{)eak- 
iiij,'.  however,  the  turnover  of  a  business  should  be  two 
;iii(l  one-half  to  three  times  the  working  capital.  Flour 
and  Iced  business,  for  instance,  owing  to  the  small  prof- 
its derived,  would  probably  have  to  show  a  turnover  of 
four  or  five  times  the  working  capital  in  order  to  be 
prolitable. 

Ample  insurance  is  necessary  in  any  business. 
Whether  a  bank  is  interested  or  not,  everv  customer 
should  be  advised  of  the  wisdom  of  keeping  fully  in- 
sured. 1  f  the  insurance  is  assigned  to  the  bank  the  sched- 
ule should  be  comi)ared  with  the  annual  statement,  and 
all  the  conditions  of  the  policy  carefully  examined. 

VM.  Bills  ami  accounts  receivable. — Bills  receivable 
ill  llie  statement  of  a  Canadian  merchant  are  generally 
tin  in  number,  as  i)ractically  all  his  trade  paper  is  dis- 
tniirited,  or  else  left  with  the  bank  for  collection.  With 
tlu  facilities  offered  by  the  banks  there  is  scarcely  any 
oltjcet  in  holding  paper  in  the  office.  Under  these  cir- 
•  imistanccs  a  large  amount  of  bills  receivable,  in  excess 
ot  eollections  held  by  the  bank,  should  be  l(M)ked  into,  as 
it  probably  means  an  accumulation  of  past  due  or  worth- 
less paper,  or  else  some  special  transactions  which  should 
lie  disclosed. 

Accounts  receivable  should  be  inquired  into,  espe- 
cially as  to  the  metluwl  of  allowing  for  bad  and  doubtful 
(k'lits.  A  distinction  is  made  in  the  statement  between 
ree(i\al)les  for  goods  sold  and  receivables  from  other 
soiirees.  Ix)ans  to  officers,  relatives,  and  friends,  and 
otlui-  irregular  transactions  are  frequently  found  in  the 
latter. 

H( ccivublcs  should  bear  a  reasonable  ratio  to  the  turn- 
over and  goods  on  hand.    This  ratio,  of  course,  would 


246 


BANKING    rUACTICE 


1 1' 


m 


i. 


vary  in  diflFerent  trades  according?  to  the  terms  of  sale. 
A  business  selling  on  ninety  days'  time  would  naturally 
show  a  higher  proportion  of  receivables  than  a  business 
selling  at  thirty  days. 

lOo.  Machincrji  and  fixtures. — Real  estate,  machinery 
and  fixtures  are  known  as  fixed  assets  and  should  only 
be  considered  as  offering  an  unknown  support  to  quick 
assets.  In  fact,  real  estate  should  be  practically  ignored 
unless  a  direct  and  steady  revenue  is  derived  therefrom. 
In  other  words,  real  estate  should  be  looked  upon  only 
as  something  to  fall  back  upon  in  case  of  need  and  never 
considered  as  a  basis  for  a  bank  loan. 

In  a  manufacturing  business  both  buildings  and  ma- 
chinery are  constantly  beifig  converted  into  goods,  and 
proper  allowance  for  depreciation  should  be  made  each 
year  out  of  profits. 

If  the  premises  are  rented  they  should  be  suitably  lo- 
cated for  the  business,  and  the  rent  paid  should  be  in  pro- 
portion to  the  business  done.  Much  depends,  however, 
on  the  nature  of  the  business  itself.  A  drug  or  tobacco 
business  could  afford  to  pay  a  large  rental  for  a  corner 
store  because  of  the  (juick  turnover  for  cash.  The  same 
rent,  however,  might  ruin  a  more  profitable  business  with 
a  slower  turnover. 

Where  the  premises  are  owned  outright  the  rental 
test  should  be  applied  on  a  basis  of  interest  and  taxes. 
If  the  valuation  of  the  owner  is  higher  than  the  business 
can  stand  on  a  reasonable  rental  basis,  the  valuation  is 
either  excessive,  or  the  business  should  be  moved  else- 
where and  the  property  sold.  The  owner  must  acknowl- 
edge either  overvaluation  or  poor  business  judgment, 
if  he  continues  to  do  business  at  a  more  expensive  stanJ 
than  his  business  warrants. 

The  value  of  the  real  estate  as  security  is  the  price  for 


LOANING   A    BANK'S   MONFA' 


247 


.nich  it  can  be  sold  at  a  forml  sale.  If  tlK.  holder  c.f  a 
n.<..t«age  has  to  foreclose,  the  property,  although  seem- 
ZJ  desirable  and  well  situated,  depreciates  enor- 
Islv,  a  result  which  is  intensified  if  the  mortgage  is 
to  a  bank.  Kxi)erience  sbows  that  a  large  sum  is  con- 
Sinned  for  overdue  interest,  legal  exi)enses,  commissions, 
a,ul  the  like,  and  this  should  be  taken  into  account  in 
estinmting  the  real  value  of  such  an  asset  as  a  means  of 

Daviuu  ott'  indebtedness.  

vm  Current  UahUitics.^Cmveut  habiht.es  generally 
..,„Msi  of  amounts  due  the  bank  and  the  wliolesa  e  trade 
,o,.  ^roods  purchased.  If  due  to  any  other  creditors  the 
oircumstanc^s  should  be  explained.  As  already  stated 
a„u,imts  <lue  to  the  bank  shouhl  be  cleaned  up  at  least 
once  each  vear  either  by  cash  or  tra.le  paper  discounted. 
'Vhe  observance  of  a  borrower's  daily  transactions  and 
a  critical  scrutinv  of  his  liability  account  from  time  to 
tin.e,  ami  one  year  with  another,  should  reveal  whether 
he  is  i)rogressing  or  otherwise. 

A  comparison  of  the  indirect  and  other  habdity  of  the 
cnstonier  on  the  b<H.ks  of  the  bank  with  the  amounts 
shown  in  bis  statement  will  sometimes  disclose  an  omis- 
sion in  the  latter.  In  one  instance,  a  branch  held  for 
collection  from  other  banks  more  than  double  the  amount 
„r  the  bills  given  in  a  statement.  Needless  to  say  the 
account  was  not  entertained. 

Where  amounts  are  due  to  other  than  trade  creditors, 
such  as  members  of  the  firm,  relatives  and  employees. 
it  is  a  disturbing  feature,  as  such  loans  are  I'^ble  to  be 
uiven  first  consideration  in  case  of  trouble.  Should  the 
a, connt  ],e  at  all  weak  in  other  res,>ects,  postponements 
of  elaim  to  the  bank  should  be  obtainetl  from  such  cred- 

'^"I'^T.  Mortgages    ami    other    factors.  -  Mortgages 


3»8 


BANKING    PRACTICE 


ri 


f'- 


.should  l)e  invariably  shown  us  a  liability,  and  the  rela* 
tive  real  estate  as  an  asset.  The  eijiiity  alone  should 
never  be  considered.  The  position  of  a  mortgage  in  re- 
gard to  taxes,  interest,  and  insurance  will  frequently 
warrant  examination. 

It  is  very  imiNirtant  that  all  contingent  liabilities 
should  be  given,  such  as  trade  paper  discounted  and 
paper  indorsed  or  guaranteed.  Such  obligations  if  not 
disclosed  and  allowed  for  will  always  be  a  source 
of  menace. 

It  is  useful  to  know  the  amount  and  disposition  of 
life  insurance  in  force,  and,  in  the  jirovince  of  Quebec, 
the  amount  of  the  marriage  contract  is  material  informa- 
tion,  as  the  latter  ranks  prior  to  an  imsecured  liability. 

The  information  called  for  by  the  reverse  side  of  the 
statement  figure  No.  54-  is  self-explanatory,  and  is  per- 
tinent to  the  consideration  of  an  application. 

Every  borrowing  customer  should  ])rovide,  in  his  will, 
power  to  his  executors  to  contimie  his  business  after  his 
death  until  it  can  be  profitably  li<|uidated.  If  a  firm,  the 
])artnership  agreement  should  contain  a  similar  provi- 
sion; otherwise  the  business  must  l)e  liquidated  without 
the  expenditure  of  further  moneys.  In  many  cases  this 
wouhl  entai!  heavy  loss  and,  if  the  bank  were  interested, 
the  safety  of  its  loans  woidd  be  endangered. 

Where  a  firm  or  corporation  operates  branch  offices 
great  care  should  be  taken  to  see  that  no  cross  drawing 
or  sales  are  allowed  to  swell  the  assets.  Many  losses  have 
been  made  through  the  careless  scrutiny  of  branch  op- 
erations, especially  where  a  branch  carries  a  deposit  ac- 
count at  a  local  bank.  Check  kiting  is  one  of  the  first 
symptoms  of  the  disease:  others  quickly  follow. 

108.  Sundrif  information. — No  statement  can  be  an- 
alyzed by  rule  of  thumb.     The  points  brought  out  in 


LOANING    A    BANK'S    MONEY 


249 


this  chapter  are  by  way  of  suggestion  only.  To  many 
acromits  of  course  tliey  would  not  all  be  applicable.  No 
unfavorable  foct,  however,  is  t(X)  unimportant  to  be  over- 
looktti  and  a  competent  manager  is  constantly  adding  to 
his  kiHiwledge  and  developing  his  power  of  drawing  in- 
ferences and  making  deductions.  At  the  risk  of  repeti- 
tion the  following  questions  are  given  and  may  be  found 
helpful  in  realizing  the  varieties  of  causes  which  con- 
tribute to  the  formation  of  a  borrower's  credit  standing. 

Are  the  borrower's  antecedents  and  character  good? 
An-  Ills  personal  drawings  from  the  business  lorge? 
Has  lie  ever  failed  or  had  a  suspicious  fire? 
I>  lie  well  liked  ond  respected  in  the  community? 
Dots  he  kite  notes  or  checks? 
Is  ho  in  good  health?     His  age? 

Is  he  what  is  known  as  a  "rehater,"  a  man  who  makes  unfair 
flfiiiiis  for  goods  in  the  hope  of  getting  rebates  or  other  con- 
ct»i()iis? 
Can  reliance  be  placed  on  his  statements? 
What  are  his  personal  hobith? 
How  does  he  spend  his  evenings? 
Has  he  technical  ability  in  his  business? 
Arc  his  books  properly  kept? 

Docs  he  extend  credit  too  freely  or  without  discrimination? 
Docs  he  cut  prices? 

Is  lie  careful  and  discriminating  in  the  purchase  of  his  stock 
or  (Iocs  he  carry  an  unnecessarily  heavy  stock? 

Is  lie  inclined  to  dabble  in  outside  ventures  such  as  real  estate 
or  stocks? 

Docs  the  business  depend  on  conditions  that  may  not  be  per- 
manent? 
Docs  he  allow  his  machinery  to  become  out  of  date  and  in- 

tfficii  Ilf  ? 

Docs  he  study  the  particular  wants  of  his  trade  with  a  view 
to  meeting  public  demands? 


MICROCOPY   RESOLUTION   TEST   CHART 

(ANS   and  ISO  TEST  CHART  No    2| 


1.0 


I.I 


1.25 


1^ 
1^ 


IB 
1^ 

IIIIM 
III  ^"^ 

1^ 

h4£ 

11^ 

1.4 


1.8 


^  /APPLIED  IIVMGE     Ir 

^^  165 J    Et:l    Moin    StrMi 

rrjS  Rochester.    New   York  '♦609       USA 

^S  (716)    482  -  0300  -  Phone 

^S  (716)   288  -  5989  -  Fa» 


///: 


250 


BANKING   PRACTICE 


Are  his  accounts  receivable  and  bills  receivable  all  genuine 
collectible  accounts  or  are  they  padded  with  slow  or  worthless 

paper? 

Does  he  take  advantage  of  all  trade  discounts? 

Are  his  sales  out  of  proportion  to  his  capital? 

Is  his  position  improving  year  by  year? 

Has  he  any  large  contingent  liability? 

Are  all  his  liabilities  given  in  the  statement? 

Are  his  profit  and  expense  accounts  in  proportion  to  his 

sales  ? 

Does  he  buy  his  raw  material  before  he  is  reasonably  sure 

of  the  amount  of  his  sales  r 

Is  he  over-ambitious  and  anxious  to  extend  his  plant  out  of 
all  proportion  to  his  working  capital? 

Does  he  turn  his  capital  quickly,  or  as  many  times  as  his 
competitors  in  the  same  line  of  business? 

Does  he  always  plan  ahead  in  regard  to  his  financial  engage- 
ments, and  know  where  the  money  is  to  come  from? 

Has  he  made  provision  for  continuing  his  business  in  case  of 

death? 

Does  he  advertise  wisely? 

Is  the  line  of  goods  he  manufactures  or  sells  one  which  is 
easily  affected  by  changing  fashions  or  seasons? 

How  do  his  annual  sales  compare  with  his  stock  on  hand  and 
bills  payable  and  receivable  accounts? 

On  what  basis  is  the  inventory  taken  and  by  whom? 

Are  his  books  audited  by  a  chartered  accountant? 

199.  Preimring  the  application.— The  consideration 
of  a  customer's  statement  along  the  lines  suggested  in 
the  previous  sections  should  assist  a  manager  in  promptly 
deciding  whether  he  will  grant  a  loan  or  not.  A  prompt 
"no"  is  often  preferable  to  a  belated  "yes."  The  latter 
implies  indecision.  The  least  indication  of  weakness  in 
the  statement  should  not  be  overlooked.  The  margin  of 
prorit  in  banking  is  too  small  to  allow  unnecessary  risk 


LOANING    A    BANK'S    MONEY 


251 


t,.  hv  taken,  and  the  bank  should  always  be  given  the 
l)t.iHtit  of  the  doubt. 

A  itl'erence  book  or  ca'  J  index  should  be  kept  on  the 
iiiaiiaj^er's  desk,  and  any  credit  information  about  cus- 
tumti"  and  others,  whether  borrowers  or  not,  should 
l)e  systematically  jotted  down.  Special  cards  or  sheets 
are  generally  used  for  obtaining  farmers'  statements, 
Figure  5.5,  and  these  are  filed  in  alphabetical  order  for 
easy  reference. 

ill  the  case  of  larger  firms  submitting  regular  state- 
ments, it  is  necessary  to  keep  a  careful  record  year  by 
year  of  the  changes  in  the  statements  and  course  of  the 
aceount.  It  is  advisable,  whether  the  account  falls 
within  the  manager's  discretionary  limits  or  not,  to  do 

this. 

Figure  56  is  a  useful  form  for  recording  this  infor- 
mation and  is  self -explanat  Dry.     The  condition  of  the 
liability  account  under  each  heading  can  be  posted  from 
the  ledger  or  from  the  monthly  liability  return.     Head 
ottiee  authorizations  or  instructions  are  entered  in  red 
ink  when  received.    Space  is  provided  for  the  analyses 
of  six  statements  and  for  records  of  the  course  of  the 
account  for  sixty  months.    A  clip  placed  over  the  name 
(if  the  month  indicates  the  expiration  of  a  credit.    The 
size  of  the  card  is  113  by  9i  inches,  and  can  be  filed 
conveniently  in  any  vertical  file.     The  blank  columns 
K.  F.  G.  can  be  used  to  record  advances  under  Section 
88,  overdrafts,  letters  of  credit,  and  the  like.     Should 
an  account  call  for  special  attention  at  any  time  all  the 
facts  of  the  case  can  be  recorded  on  a  follower  which 
is  a  differently  colored  card  ruled  with  horizontal  lines 
only. 

This  statement  card  can  also  be  used  with  advantage 
hy  a  Iiead  office  for  keeping  a  record  of  the  course  of  the 


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*  The  description  of  the  parcels  of  land,  with 
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254 


BAN  KIN  (i    rU  ACTU'E 


larger  accounts,  by  posting  from  the  monthly  liability 
return  of  the  various  branches. 

AV^hen  a  loan  is  outside  the  manager's  discretionary 
limits  it  must  be  submitted  to  the  head  office  accom- 
panied by  a  definite  recommendation.  The  latter  is  es- 
sential. Therefore,  as  soon  as  the  manager  decides  that 
a  loan  of  this  nature  is  desirable,  he  prepares  the  state- 
ments recjuired  by  the  head  office  and  forwards  them 
with  his  letter.  Figiu'e  57  gives  an  exact  copy  of  a  cus- 
tomer's statement  with  space  for  a  revaluation  of  the 
assets  by  the  manager  at  the  foot.  Figure  58  provides 
for  a  detailed  analysis  and  comparison  of  the  last  two 
statements  on  file,  and  also  gives  a  comparison  of  the 
statements  for  the  past  five  or  six  years.  In  Figure  59 
the  course  of  the  liability  account  is  given  for  the  past 
year  with  sundry  other  information.  The  course  of  the 
deposit  account  should  also  be  referred  to. 

200.  Jlie  application. — The  most  severe  test  of  a 
manager's  ability  and  soundness  of  judgment  is  found 
in  the  writing  of  a  letter  of  application.  The  reasons 
for  recommending  the  loan  should  be  concisely  stated 
and  no  pertinent  fact  omitted.  In  other  words,  the  head 
office  should  never  have  occasion  to  write  back  for  fur- 
ther information  or  missing  particulars. 

A  separate  letter  should,  of  course,  be  written  for  each 
account,  and  tlie  condition  of  the  liability  and  security 
at  the  moment  of  writing  should  be  set  forth  at  the  head. 
The  letter  should  further  give  a  concise  statement  of: 

(a)  Tlie  amount  of  credit  a])plied  for; 

(b)  The  purpose  for  which  the  advances  are  to  he 
used ; 

(c)  When  the  advance  will  be  required; 

(d)  When  and  from  what  source  payment  is  ex- 
pected. 


r,i>  r  full  Nrnne  or  Xbitim  1 
■  ['irtmr:'.  Age,  BueincM,  ' 

,;,,)  l!r-ii|crii-c. 


BitANrn 


I 
STATEMENT  OF  THE  AFFAIRS  OF 


Asset* 


Sales  for  past  year $ 

Losses  "  * 

Insurance  on  Liquid  Assets.* 
on  Fixed  Assets.  $ 

Real  F.stnte  Searched 


M\NAOERS   ABSTRACT   OF   ABOVE. 
WITH   HIS  VALUATION  OF  ASSETS 


iI.KjriD  .\»»ET«: 

I     f;ish,  Bills  Receivable 

!        and  .\ccounts 

'.     Mfrihandisc    held    for 
1         .-^alc 


Mivrollaneoiis  movable 

pror>orty 

KixKU  .XssETs; 


Flo.*tino  Lubiutiks: 

To  Bank  Accounts  Payable 

Rills  Payable 

ToSundrj-  Parties 


Morto.\<;e  Pebts: 

Srrplii'*    ...         

I.iiibilil  .•  lis  1',ndr>r?rr  or  (luar- 
antor    not     included   above 
namel>"  on;-- 
Trade  Paper  in  CiLstonier'' 

.Vccount 

On      other      Account'      at 

Branch  * 

On     other    Account*    el<c- 

where - 


1 


Fiouhe  57 

255 


Name  ol  rustomcr . 


COMPARISON    BETWEKN   ACCOMPANYING   STATEMENT 
AND   LAST   PKEVIOLS  STATEMENT 


Asp 

Laa 

Previ 

Statcn 

Dat< 

It 

er 
t 

DUS 

lent 

!d 

» 

As  per 

Present 

Statement 

Dated 

19  . 

Incre 

■so 

necniN 

Liquid  Amets:                    ,  ^ 
Cash.  Billfl  Reopivablc  and  Accounts 

Net 

Net 

Fixed  Arhetm: 

Mortgagps  and  othrr  Invpf»tmont» 

Chattels  and  other  Dormant  Asacta 

1 

Total  Fixed  Aaactfl       

Set 

Net 

• 

Deer 

ease 

Incr 

ntt 

Floating  LiABiuTiEa: 

Rills  Payable        

Net 

Net 

Mortgage  Debts: 

— 

Net 

Net 

1 

1 

Surpluh; 

1     . 

Increase — Derrea^te  in  Tjf)ui(l  Assots.  ._._ $ 

Increase — Decrease  in  Floating  Liabilities _— 

Increase — Decrease  in  Liquid  Surplus • 

Increase — Decrease  in  Fixed  Assets $ 

Increase — Decrease  in  Mortgase  Debts . 


increase — Decrease  in  Total  Surplus % 


-  ! 

11 

1 

1 

1 

19 

19 

19 

19. 

LiQTTiD  Assets 

Floating   Liabili- 
ties   

Liquid  Surplus.  . 

Fixed  Assets 

MoRTOAGE  Debts  . 

Fixed  ScHPLva 

Total  Surplus 



1 



"        ^ 

Figure  58 

S56 


Brnnrli,  ^      U»l 

MIMOUANDIM   TO   ACCOMTANY    ArrLKATION    FOK   A   CREDIT 
O.N    BEHALF   OF 


Com'n 

Course  of  Loanii,  ctr.,  for  each  month  in  the  year  preceding  this  date. 


Month 


j  LOANH 

'  (Including  Overdraft") 


Muxirimm  iMinimum 


Collateral  Bil!.m 
held  when  Loans  at 


TiiADE  Bill* 


Maximum 


Minimum 


l.nanf    lllEhcst  point,         ,  191  ,  S 

ilnrlmlinit  Overdrafts) 


Lowest  point, 


Trade  Bills  Disc'd:    Highest  point,         ,191  ,  S 
,191  ,  $  Lowest  point,  ,  191    S 


Prospiit  Condition  of  the  Account:     (Show  all  liabilities,  direct  and  indirect,  with  securities 
held,  values,  etc.)  • 


Rate  of  Interest  and  Discount:  Exchange 

Circulation  paid  out  last  year,  S  Profit:    Exchange,  Commission,  etc.,  collected,  S 

Total  Sales  claimed  by  Customer  for  year  ending  at  date  of  his  last  annual  balance  sheet,  S 

Cash  .<:ilc3,  $  Sales  not  settled  by  bill  or  note  discounted  with  the  Bank,  S 

Gross  Total  of  Trade  Bills  discounted  during  same  period.  No.  ,  Amount,  $ 

Bills  Returned  Unaccepted,  No.  ,  Amount,  S 

Bills  Returned  Unpaid,  No.  .  Amount,  I 


FiotntB  59 

257 


C-VIII— 17 


'i.>H 


HANKING    I'HACTKi: 


M' 


S»niicliiucs  i)relimiMary  letters  may  have  been  writ- 
ten K'^'"K'  information  on  some  ol'  these  points,  hut  the 
final  letter  should  nevertheless  contain  full  particulars, 
and  reference  to  i)revious  letters  or  statements  should 
not  he  made  tnerely  to  save  the  trouhle  of  repeating  in- 
formation, except  in  siK-'cial  and  involved  cases.  It  is 
much  more  economical  in  time  and  labor  for  a  branch 
manager  to  set  forth  the  ease  fully,  rather  than  to  put 
the  head  office  to  the  trouble  and  delay  of  looking  up 
references. 

The  reasons  leading  to  the  recommendation  and  any 
criticism  of  the  account  should  be  carefully  and  sys- 
tematically assembled  and  the  information  set  out  in  due 
order  and  se(iuence,  each  subject  being  discussed  in  a 
separate  claiise,  and  all  to  be  said  on  a  particular  sub- 
ject brought  together  in  one  place  as  far  as  possible. 
This  can  only  be  accomplished,  as  a  rule,  by  the  letter 
being  first  drafted  and  carefully  corrected  before  it  is 
written.  If  the  application  is  from  a  new  customer  the 
cause  of  the  change  in  his  bank  account  should  be  re- 
])orted,  and  if  the  a])plication  is  for  a  line  of  trade  paper 
a  list  of  the  trade  bills  undeu  discount  with  liis  previous 
bank  should  accompany  the  letter. 

If  these  simple  recjuirements  are  carefully  complied 
with,  the  head  office  will  be  in  a  position  to  accord  a 
prompt  authorization  or  otherwise  of  the  application. 


CHAPTEH   VII 


CLASSIFICATION    OF    LOANS 


•iOl.  Call  loans. — The  subject  of  call  loans  in  Canada 
or  elsewhere  as  an  asset  of  the  bank  has  already  been 
dealt  with  in  Chapter  VI,  Part  1,  and  it  is  only  necessary 
to  describe  briefly  the  methods  of  making  such  advances 
in  Canada.  These  loans  are  generally  made  to  brokers 
on  satisfactory  stocks  and  bonds  listed  in  the  local  mar- 
ket, and  with  a  margin  of  about  20  per  cent  and  10  per 
cent,  respectively. 

Two  margin  tests  should  be  applied:  first,  a  20  jier 
cent  margin  of  security  above  the  amount  of  the  loan; 
seeoiid,  ten  points  per  share  less  than  the  market  value 
of  the  stock.  The  first  test  insures  an  ample  margin  on 
hi<'h-priced  stock,  and  the  second  discriminates  against 
low  non-dividend  paying  stock.  For  instance,  20  per 
cent  on  stock  selling  at  $30  per  share  would  mean  a  mar- 
flin  of  $()  per  share  as  against  $10,  or  33i  per  cent,  called 
lor  by  the  second  rule. 

Figure  60  is  the  form  in  general  use,  and  combines 
in  one  the  hypothecation  and  the  agreement  of  sale  in 
case  of  default  in  keeping  up  the  necessary  margin. 
Tile  discount  clerk  should  see  that  every  certificate  of 
stock  pledged  is  good  delivery;  that  is,  the  certificate 
must  be  in  the  name  of  a  responsible  broker  or  the  en- 
dorsement guaranteed  by  a  broker  whose  signature  the 
bank  knows,  and  should  be  assigned  in  blank  and  wit- 

259 


1«1 

Thfl    unHrrsignrJ    hrrrby    urkDowliilgp    to    have    rercivtd    Item   THE 

BANK  

UollnrK,    B»    iin    !nlvnnri',    whirb    tttni    will   be»r 

kt  tbo  rstr 


Intcrpst  from  llii"  <l«l<" 

p(  ,„.r  ciMil  iHT  iinimm,  ii.<  well  iifti-r  «»  brforo  mUurity,  and  ia 

rrpayiiljlc  

And  the  uudiTsigncd  li;ivinc  r.-iiiwd  in  Ih>  Irnn.-ferrcd  to  th«  Bank,  or  to 
one  or  more  o(  iho  officers  tl»n..(  in  Iriint,  Ihr  Mlowiog  i»rurity.  umtly: 


•»«»«•«• 


«   il   II   H 


to  hr  hi'ld  II*  cnllatcriil  «riirily  f..r  Ihr  paymont  i)(  tlir  nuid  advance  ud 
intcriwt,  tlio  Buak  is  hrnhy  luitlixriii'd  to  pcII  and  roiivry  the  said  security, 
or  purl  thtrt'of  from  tinif  to  tiino,  whenever  the  Hank  Hhall  think  proper,  upon 
default  in  the  payment  of  tlie  »uid  advance,  and  to  apply  the  proceed*  tliereol 
toward*  its  reimbursement ,  without  prejudice  to  its  clu-nii  upon  the  undw- 
signed  for  any  deficiency. 

Should  the  naid  »ecurity  depreciate  in  value  before  the  maturity  of  Mid 
advance,  tho  Bank  is  hereby  authoriicd  to  wll  and  convey  the  name,  or  part 
thereof,  from  time  to  time,  without  waiting  the  day  of  payment. 

It  ia  also  hereby  agreed  that  should  the  Hank  at  any  time  determine  upoB 
a  sale  and  convc>anoc  of  the  said  .-crtirity,  or  part  thereof,  from  time  to  time, 
for  cither  of  the  reasons  above  stated,  such  sale  and  conveyance  may  be  mid« 
without  notice  to  the  undirsigm-.l,  all  and  every  formality  prescribed  by  law 
or  otherwise  in  relation  to  such  sale  and  conveyance  b<'ing  hereby  waived. 

And  it  is  further  agrceil  that  should  the  Bank  allow  the  undersigned  to 
substitute  for  tho  above  other  collateral  security,  such  substituted  security  i 
shall  be  held  by  the  Bank,  subject  to  the  same  terms  and  conditions,  and  with  j 
power  and  authority  to  dispose  of  and  apply  the  same  in  the  same  manner  la  \ 
the  Bank  could  have  done  with  the  original  security. 

And  it  is  understood  and  agreed  that  the  Bank  is  at  liberty  to  retain  and  | 
use  the  above  mentioned  security  (or  substituted  security)  as  collateral  for 
any  other  indebtedness  or  liability,  present  or  future,  of  the  tmdersigned  to 

the  Bank. 

In  case  any  security  or  substituted  secuiicy  tran.»ferred  to  or  lodged  with 
the  Bank  is  in  the  form  of  a  certificate  for  shares  of  stock,  with  a  blank  transfer 
and  power  of  attorney  in  blank  to  transfer  the  shares  of  stock  on  the  books  of 
the  Company  endorsed  thereon  or  attached  thereto,  the  Bank  is  hereby  author- 
iicd,  through  any  of  it.^  officers  or  employee.-,  to  fill  in  all  blanks  in  such  transfm 
and  powers  of  attorney  with  such  names  and  in  such  manner  as  may  be  thought 
best  by  the  Bank,  and  to  sea!  and  dcUvcr  the  same  after  such  blanks  have 
been  filled  in. 

Witness  the  hand  ami  seal  of  the  undersigned. 


Figure  tiO.     FORM  FOR  HYPOTHECATING  COLLATERAL 

260 


(i.ASSII'K  ATIUN    OF    LOANS 


201 


iitsM*!.     These  miiiiirimiits  iml  only  insure  the  jteiiii- 
imiKss  of  Ihc  sttK'k,  hut  also  that  ehiiiiis  I'or  dividends 
arc  made  "ii  responsible  brokers  by  the  hohlers  of  the 
stock.     To  make  a  transfer  every  time  a  eertifieate 
(lian^es  hands  would,  of  eoiirse,  be  impossible.    Bonds 
sliDiild  i)e  serutini/,ed  to  see  that  they  are  payable  to 
iKiircr,  and  all  bonds,  debentures,  eertifieates  of  stock, 
and  similar  eertifieates  pledged  as  collati'ral  for  advances 
(ir  l(»(ln;c'd  for  safekeeping  should  be  kept  in  the  treasury 
under  the  joint  custody  of  the  manager  and  accountant. 
All  security  as  soon  as  received  should  be  recorded  in  the 
snuiities  register  by  the  number  of  the  certificate  or 
1h)ii(1,  the  name  of  the  company,  the  number  of  shares, 
the  |)ar  value  of  the  shares,  and  the  name  of  the  broker  to 
whom  the  certificate  is  assigned.     It  should  be  the  in- 
variable ])ractice  of  every  bank  to  record  the  above  par- 
ticulars of  any  stock  passing  through  its  hands,  whether 
nccived  as  security  or  simply  passing  through  the  bank's 
liooks  attached   to  a  draft.     In  case  of  the  loss   of 
the  scrip  such  information  has  often  proved  invaluable. 
'2i)'2.  Loans  to  joint  stock  companies. — A  joint  stock 
company  has  been  defined  as  an  association  of  indi- 
viduals possessing  corporate  powers,  enabling  them  to 
transact  business  as  a  single  individual.    Such  companies 
may  obtain  incorporation  in  Canada  in  several  ways. 

1.  By  special  act  of  either  the  Parliament  of  Canada 

or  the  provincial  legislatures. 

2.  Ity  letters  patent  issued  under  the  general  Com- 

panies Acts  of  the  Dominion  of  Canada  or  of 
the  provinces  of  New  Brunswick,  Prince  Edward 
Island,  Quebec,  Ontario  or  INIanitoba. 

3.  I?y  memorandum  of  association  in  the  provinces  of 

Nova  Scotia,  Saskatchewan,  Alberta  and  British 
Columbia. 


20^2 


BANKING    PRACTICE 


Iff. 


"It 


As  llie  powers  conrcnvd  <)i»  fompanics  under  these 
several  metliods  of  iiieorporation  vary,  banks,  as  a  rule, 
issue  instructions  to  their  branches  in  the  different 
provinces  regarding  loans  to  joint  stock  companies;  spe- 
cial forms  for  by-laws,  etc.,  are  also  supplied. 

When  considering  loans  to  companies  incorporated  hy 
special  acts,  it  is,  of  course,  necessary  to  refer  to  the  com- 
panies' charters  in  each  instance. 

In  opening  an  account  with  a  joint  stock  company,  it 
is,  therefore,  necessary  to  ascertain  the  following: 

1.  Has  the  company  power  to  borrow? 

2.  Have  the  directors  authority  to  exercise  that  power 

without  a  by-law  of  the  shareholders? 

3.  Is  there  a  specified  limit  to  the  amount  which  can 

be  borrowed  and  has  that  limit  been  reached? 

4.  Have  the  directors  power  to  secure  the  payment  of 

moneys  borrowed  by  giving  security  under  Sec- 
tions 86-90  of  the  Bank  Act  or  by  mortgage  or 
other  charge  on  all  or  any  part  of  the  assets  of 
the  company? 
This  information  can  be  obtained  from  the  charter 
and  records  of  the  company  and  from  the  statute  under 
which  the  company  is  incorporated.     These  questions 
being  satisfactorily  answered,  it  is  customary  for  the 
directors  of  the  company  to  pass  a  resolution  outlining 
the  powers  of  the  signing  officers,  and  specifying  who 
they  are  to  be.    A  certified  copy  of  this  is  generally  sup- 
plied to  the  bank  on  a  form  similar  to  that  on  page  263. 
Where  a  by-law  of  the  shareholders  is  necessary  to 
confer  borrowing  powers  on  the  directors,  a  certified 
copy  of  the  by-law  is  supplied  to  the  bank  on  a  form 
similar  to  tha^^  on  page  264,  supplemented  by  the  direc- 
tors' resolution  above  referred  to. 


REsoLfTioN  passed  by  the  Board  of  Directors  of  the 


illaL  held  at  the  office  of  the  Comimuu  in 
on  the      ^f"y"S 


at  a  meeting  duly 
,  19t 


On  motion  it  was  resolved  that        .    ..     ;    ,      .,  . 

,„  a^?d        hereby  authorized  on  behalf  of  the  Cc)n,pany  to 

dn  V    accept,  sign,  make  and  a«ree  to  pay  a  1  or  any  U.lls  of 

San^    Promissory  Notes,  Checks  and  Orders  for   the    pay- 

^ef  money;   also  to  authorize  any  Manager  or  other  officer 
n  till       mu    y .  ^  ^^^  ^^  ^p^^p^  ,jjl  jjp  jj„y  Drafts 

riwis  of  Exchange  on  behalf  of  the  Company;    also  to  sign 
.hecks  upon  and  to  borrow  money  from  thk  - 

3VVK  on  behalf  of  the  Company,  either  by  overdrawmg 
the  account  of  the  Company  with  the  said  Bank  or  otherwise. 

^}^  ^^^*   i^reby  authorized  on  behalf  of  tl^  to 

si'"n  and  tranlr  to  the  Bank  all  or  any  Stocks.  Bonds,  \\are- 

mte  Receipts,  Bills  of  Lading,  and  other  securities   and  to  give 

r imk  Srity  under  Section  88  of  the  Bank  Act,  and  to  sign 

1  wrulen  promise  or  promises  binding  the  Company  to  give  any 

such  securities  as  p'   -esaid. 

or.;):Imie';rf\hem:beami:::.  hereby  authorized 
rV)mpany  to  negotiate  with,  deposit  with,  or  transfer  to  the  said 
,k  Cfor  credit  of  the  Company's  account  only)  all  or  any 
s  of  Exchange,  Iromissory  Notes,  Checks  or  Orders  for  the 
pavnient  of  money  and  other  negotiable  P^P«'-';"»^J^:i  K^ 
purpose  to  endorse  the  same  or  any  of  t^em  on  l)ehalf  o 
Coinnany  also  to  arrange,  settle,  balance  and  certify  all  books 
Lui  Jccountrretween  the'company  and  the  Ba"k-d  to  receive 
all  paid  checks  and  vouchers,  and  to  sign  the  Bank  s  form  ol 
settlement  of  balances  and  release. 


CERTIFIED  a  true  copy  of  the  Resolution  passed  <^f  foveset 
forth  and  recorded  in  the  Minute  Book  of  the  proceedings  of  the  Board 
of  Directors  of  said  Company.  ,„, 

Dated  the '''"'  "^  '  ''^ 


day  of 


U- 


L.  S. 


PRESIDENT 


SECRETARY 


The  President  and  Secretary  will  sign  as  above;  the  other  officers 

as  f  illows:  ...      „      .,  „, 

\  ice-IresidcM 


if 


263 


BY-LAW  of  the 


Be  it  Exacted  as  a  By-law  of  the  Company  as  follows: 

The  Directors  may  borrow  money  on  the  credit  of  the  Company 
from  time  to  time  and  in  such  amounts  as  they  may  think  proper, 
and  may  hypothecate,  mortgage  or  i)ledge  the  personal  property 
of  the  Company  to  secure  any  sum  or  sums  borrowed  for  the 
purposes  thereof. 

The  borrowings  of  money  from  time  to  time  heretofore  under 

the  authority  of   the    Directors    from  the 

BANK  and  the  giving  of  securities  therefor  under  Section  88 

of  the  Bunk  Act  or  otherwise,  are  hereby  ratified  and  confirmed. 

In  witness  whereof  the  corporate   seal  of  the 
Company  has  been  hereto  affixed,  an^I  this  By -law 

dulv  countersigned  the 

day  of 191 

L.  8.       > 

PRESIDENT 


il: 


At  a  general  meeting  of  the  shareholders  of  the  above-named 
Company  duly  called  for  considering  the  foregoing  By-law,  which 
was  passed  by  the  Directors  on  the day  of 

191         ,  and  held  on  the 

day  of 191  ,  the  same  was  duly  sanc- 
tioned and  confirmed  by  a  vote  of  not  less  than  two-thirds  in  value 
of  the 

(1)  subscribed  stock  represented 

■      at   such   meeting. 

(2)  shareholders  present  in  person  or  by  proxy 


CHAIRMAN  OF  THE   MEETING 


SECRETARY 


264 


CLASSIFICATION    OF   LOANS 


265 


ll  may  be  sctri  I'roin  the  above  tliat  care  should  be  ex- 
ercised by  a  bank,  not  only  in  opening  an  account  with  a 
company,  but  also  in  any  subsequent  transactions.    It  is 
well  to  remember  that  a  corjjoration  has  no  personal  lia- 
bility, that  no  director  or  officer  of  a  company  is  identi- 
Hcd  with  the  business  of  the  company  as  closely  as  he 
would  be  if  it  were  his  own  undertaking,  and  that  failure 
of  a  company  can  affect  a  director  or  shareholder  only 
to  the  extent  of  the  amount  of  his  shares.    In  view  of  this 
limited  liability  it  is  customary  among  banks,  when  a 
company  is  a  frequent  applicant  for  loans,  to  require 
the  personal  guarantee  of  the  directors.    The  logic  of 
this  is  sound,  and  the  refusal  on  the  part  of  the  directors 
to  comply  with  this  condition  should  be  considered  with 
extreme  caution.    If  the  men  who  are  managing  the  com- 
pany have  not  sufficient  confidence  in  their  own  manage- 
nicu't  to  guarantee  the  loan,  why  should  the  bank  take 

the  risk? 

•20.3.  Loans  to  municipalities— The  conditions  govern- 
ing loans  to  municipalities,  school  districts  and  other 
pirhlic  bodies  differ  in  the  various  provinces  and  also  in 
the  cases  of  cities  incorporated  under  special  charter.  As 
the  laws  are  frequently  changing  no  general  procedure 
can  be  formulated.  The  head  office  of  each  bank  gener- 
ally issues  specific  instructions  and  forms  regarding 
these  loans  to  their  branches  in  the  several  provinces. 

Generally  speaking,  municipalities,  on  resolution  of 
their  councillors,  are  authorized  to  anticipate  taxes  by 
horrowing  up  to  a  certain  percentage  of  their  annual 
assessment.  These  borrowings  must  usually  be  retired 
hv  the  taxes  as  they  are  paid  in.  The  loans  are,  and 
sh(  aid  be,  short  in  term.  When,  however,  one  year's 
horrowings  overlap  another  the  advances  should  be  kept 

distinct.    S\ich  loans,  when  supported  by  authentic  copies 


266 


BANKING    PRACTICE 


of  the  resolution  of  the  oouiieil,  may  be  eonsidered  legiti- 
mate banking  undertakings. 

Frequently  a  munieipality  is  authorized  by  a  by-law, 
voted  on  by  its  ratej)ayers,  to  borrow  money  for  some 
specific  puri)ose,  such  as  water  works,  drains  and  the  like. 
It  is  advances  of  this  description  which  form  one  of  the 
objectionable  features  of  nmnicipal  accounts.  As  a  rule, 
municipalities  postpone  any  definite  arrangement  as  to 
the  disposition  of  the  bonds  until  the  construction,  for 
which  the  issue  is  authorized,  has  been  completed.  In 
the  meantime,  they  look  to  their  banks  for  advances 
from  time  to  time  until  the  w'ork  is  fully  accomplished. 
This  feature  in  itself  is  not  objectionable  if  the  munici- 
pality takes  immediate  steps  to  dispose  of  its  bonds  on 
the  completion  of  the  work.  Unfortunately,  this  is  sel- 
dom the  case.  Financial  committees  sometimes  number 
among  their  members  one  or  more  amateur  financiers, 
who  not  only  have  exalted  ideas  of  the  market  value  of 
the  bonds  in  question,  but  also  overestimate  their  own 
ability  in  judging  market  conditions.  The  result  is  that 
the  time  in  their  opinion  is  rr.rely  opportune  for  making 
a  sale  of  the  bonds,  and  the  bank  is  confronted  with  the 
necessity  of  continuing  to  carry  an  unsatisfactory  loan 
or  enforcing  a  sale  of  the  bonds,  both  undesirable  alter- 
natives. The  proper  method  to  follow  in  making  such 
advances  is  to  see  that,  at  the  inception  of  the  loan,  a 
definite  arrangement  is  made  as  to  the  disposition  of  the 
bonds  irrespective  of  market  or  other  conditions. 

204.  Loans  to  professional  men. — Loans  to  profes- 
sional or  salaried  men  cannot  be  considered  desirable 
from  a  banking  point  of  view,  or  from  any  point  of  view 
for  that  matter.  Even  where  the  applicant  is  possessed 
of  private  means,  a  loan  of  this  nature  is  more  or  less 
objectionable  according  to  its  object  and  the  under- 


CLASSIFICATION    OF    LOANS 


267 


slaiidiiiK'  as  lo  final  payment.  Tlic  money  may  l)c  locked 
„|,  in  some  undesirable  venture,  and  though  sure  of  ulti- 
mate payment  the  bank  is  confronted  with  the  alterna- 
tive of  carrying  a  dead  loan  or,  by  enforcing  payment, 
making  an  enemy  of  a  desirable  citizen. 

Loans  to  men  who  depend  entirely  on  their  salaries 
and  professional  earnings  should  not  be  considered  ex- 
cept in  very  exceptional  cases.  If  a  i-ian  cannot  live 
on  his  salary  he  cannot  hope  to  pay  oL  an  indebtedness 
ill  addition.  The  loan  is  either  intended  to  discharge 
another  indebtedness  or  to  purchase  something  which 
cannot  be  paid  for  out  of  future  salary.  Credit  is  a  good 
servant  and  a  bad  master,  and  many  men  in  these  days 
of  competition,  both  social  and  otherwise,  are  induced 
to  "keep  up"  with  their  neighbors,  purchase  automobiles, 
and  generally  live  in  a  style  beyond  their  means. 

Retail  merchants  frequently  offer  this  class  of  paper 
for  discount,  and  the  objection  to  this  is  even  more  pro- 
nounced. If  a  man  cannot  pay  for  the  necessities  of 
life  for  his  family  there  is  not  much  likelihood  of  his 
being  able  to  pay  off  a  debt. 

These  remarks  are  not  intended  to  apply  to  worthy 
l)e()ple  who  have  suffered  misfortune,  and  to  whom  every 
consideration  should  be  shown,  but  it  does  refer  to  people 
entirely  dependent  upon  moderate  salaries,  received  with 
a  regularity  which  renders  credit  unnecessary. 

20.).  Loans  to  fanners.— Under  certain  conditions  of 
fanning,  more  especially  in  the  West,  credit  for  a 
fanner  is  more  or  less  a  necessity,  and  loans  to  respon- 
sible farmers  is  a  desirable  and  legitimate  business  for  a 
f)ank.  In  the  East,  where  mixed  farming  prevails,  the 
farmer  is  not  only  in  easy  circumstances,  with  perhaps  a 
savings  bank  account  or  money  loaned  out  on  mortgage, 
but  he  has  a  more  or  less  certain  income  throughout  the 


2F# 


268 


nANKING    I'UACTICK 


I 


\\ 


in 


year  from  the  sale  of  raiiii  in-odiicc-  to  llic  iiLi^iilxniiii; 
towns.  Loans  when  made  to  him  are  «»enerally  lor  soini; 
specific  purpose — such  as  the  [)urchase  of  cattle  for  fat- 
tening— in  other  words  for  the  creation  of  an  immediate- 
ly li(iuid  asset. 

In  the  West,  however,  where  grain-growing  only  pre- 
vails, a  farmer  has  practically  only  one  crop  a  year. 
and  it  is  necessary  for  him  to  have  credit  while  he  is 
preparing  for  the  croj),  as  he  has  to  wait  until  the  fall 
before  receiving  any  return  for  his  year's  work.  Seed 
must  be  bought,  labor  paid  for,  and  while  the  crop  is 
growing  he  must  live.  Few  farmers  can  cultivate  their 
farms  without  some  credit  either  from  a  bank  or  store, 
and  if  no  credit  were  extended  they  could  neither  pur- 
chase nor  produce  anything. 

Credit  to  a  farmer,  no  matter  what  his  moral  or  finan- 
cial standing,  is  relative  and  should  not  exceed  a  year's 
supplies  at  any  time.  The  loan  should  be  cleaned  up 
regularly  after  harvest,  unless  arrangements  were  made 
by  way  of  advances  under  Section  88  of  the  Bank  Act. 
The  size  of  the  farm  and  the  amount  of  land  under 
crop  should  also  be  carefully  considered;  some  farmers 
are  too  ambitious  and  try  to  farm  too  much  land.  The 
teimre  of  the  land,  the  amount  of  mortgage,  and  other  in- 
debtedness, especially  for  machinery,  are  all  important 
features  in  considering  advances  to  I  lis  class.  As  a  rule, 
the  farmer  should  not  recpiire  to  borrow  from  the  bank 
until  seed-time  to  })ay  for  seeds,  labor,  and  the  like.  If 
his  crop  is  successful,  he  should  be  clear  of  his  indebted- 
ness before  the  end  of  the  year,  and  have  a  good  surplus 
to  pay  on  his  mortgage  or  place  in  the  bank. 

A  clause  in  Section  88  of  the  Bank  Act  of  1913  per- 
mits a  bank  to  lend  money  to  a  farmer  "on  the  security 
of  his  threshed  grain  grown  upon  the  farm."    The  ad- 


CLASSIFICATION    OF    LOANS 


209 


(litioii  of  Ihis  clause  was  due  to  the  fact  that  the  grain 
(nowii  by  a  farmer  in  the  ^Vest  was  expected  to  clean 
lip  liis  indebtedness  at  harvest  time  or  shortly  after- 
ward.   This  condition  worked  a  hardship  on  the  farmer, 
\\\\n  sometimes  had  to  throw  his  crop  on  the  market  re- 
irardkss  of  prices,  instead  of  having  an  opportunity  to 
await  normal  conditions.     The  volume  of  sales,  more- 
i)\tr.  at  this  time  depresses  prices  and  adds  to  the  con- 
tusion and  congestion  on  the  railways.     The  farmer  is 
now  ill  a  position  to  offer  the  security  of  a  staple  article, 
and  tan  borrow  enough  on  his  crop  to  pay  off  his  in- 
debtedness.   It  is  still  early  to  give  any  opinion  on  the 
result  of  the  new  law  but,  speaking  generally,  it  will 
])ossil)ly  not  make  very  much  difference  to  the  responsi- 
ble farmer,  as  he  was  able  to  borrow  money  on  his  own 
note  in  any  case.     As  to  the  farmer  of  less  favorable 
standing,  it  is  questionable  whether  a  security  entirely 
under  his  control  will  improve  his  chance  of  credit. 

•iO(i.  Loans  to  retail  merchants. — As  a  general  rule, 
retail  merchants  are  not  entitled  to  unsecured  advances 
on  their  own  name.  A  storekeeper  who  takes  consid- 
erable credit  from  the  wholesale  trade  should  be  able  to 
obtain  all  liis  credit  from  that  source.  If  his  position 
is  not  such  as  to  enable  him  to  do  this,  a  bank  should 
not  intervene  unless  he  is  able  to  put  up  good  trade  bills 
or  other  security.  A  bank  has  only  the  bare  interest  in 
the  loan,  while  the  wholesale  merchant  has  a  margin  of 
•20  or  30  per  cent  profit  to  fall  back  on  in  case  of 
loss.  If  the  loan  is  sought  for  the  purpose  of  paying 
cash  for  goods  purchased,  it  should  be  borne  in  mind 
that  the  usual  discount  granted  by  the  seller  for  cash  is 
12  per  cent  per  annum  or  more,  that  being  in  effect  his 
estimate  of  the  degree  of  risk,  while  for  precisely  the 
same  risk  the  bank  is  asked  to  be  satisfied  with  7  per 


270 


BANKING    PKACTKK 


I' 


cent  or  even  less.  The  mere  transfer  of  an  obligation 
from  the  mercantile  creditor  to  a  bank  does  not  dimin- 
ish  by  one-half  the  monetary  risk  of  the  accommodation; 
it  is  illogical  and  irrational  to  assume  such  risks  for  an 
ordinary  banking  rate  of  discount. 

Loans  to  retailers  are  dangerous  both  to  the  bank  and 
to  the  borrower;  to  the  bank  on  account  of  the  risk,  and 
to  the  borrower  l)ecause  it  frequently  leads  to  lax  meth- 
ods of  collecting. 

207.  Loans  to  manufacturers  and  merchants. — Nat- 
urally the  bulk  of  the  loans  of  a  commercial  bank  consists 
of  advances  to  manufacturers  and  wholesale  merchants. 
Both  classes  are  considered  highly  desirable  custom- 
ers. They  are  at  times  heavy  borrowers  from  banks,  and 
a  consideration  of  their  relative  merits  in  that  connec- 
tion is  of  interest.  :Mr.  Geo.  Hague,  in  his  "Banking 
and  Commerce,"  has  expressed  himself  so  clearly  on  the 
subject  that  he  is  well  worth  quoting: 

There  is  this  fundamental  difFerence  between  the  wholesale 
merchant  and  the  manufacturer;  that  the  merchant,  if  his  credit 
is  good  enough,  can  put  the  whole  of  his  stock  upon  his  shelves 
without  the  expenditure  of  a  single  dollar  except  for  freight 
and  duties.  Good  credit  will  enable  him  to  obtain  all  he  wants 
from  manufacturers  on  this  side  of  the  Atlantic,  or  from  whole- 
sale houses  in  England.  But  a  manufacturer  can  do  nothing 
of  the  kind.  From  the  time  that  he  begins  operations  he  has 
to  provide  for  a  cash  expenditure  which  never  ceases  until 
goods  are  ready  for  sale.  In  nearly  every  branch  of  manu- 
facture he  rust  pay  cash  for  his  raw  material  and  his  fuel. 
And  the  moment  he  begins  the  manufacturing  process,  his  pay- 
roll of  wages  confronts  him  week  by  week,  and  must  be  met. 
There  can  be  no  possibility  of  asking  credit  here ;  not  for  a 
single  week  could  wages  be  left  unpaid.  In  the  case  of  the 
special  lines  of  manufacture  lately  under  review,  where  wages 
are  a  most  important  item  of  cost,  the  necessity  of  meeting 


C'LASSU'KATION    Ol'    LOANS 


271 


the  liirge  sums  required  is  the  most  harussinj;  of  all  financial 
prc>Mne.s.  It  presses  indeed  more  heavily  than  the  necessity 
of  imL'ting  acceptances  and  promissory  notes,  for  the  payees 
of  tlit'se  can  be  approached  for  renewal  at  a  pinch,  while  a  rc- 
quiNt  to  a  body  of  workmen  to  defer  payment  of  wages  is  utterly 
impossible.  And  as  payment  is  imperative,  the  manufacturer 
will  iiuturally,  in  such  circumstances,  have  recourse  to  his 
l);iiikt'r. 

Hi iKc,  it  is  more  difficult  to  finance  for  a  manufacturing  es- 
tiihlisliincnt  than  for  the  business  of  a  wholesale  merchant.  The 
liittir,  having  the  power  to  buy  goods  at  all  times  on  credit. 
Ills  no  reasonable  ground  for  asking  regular  advances  from 
lii>  banker.  His  dealings  should  be  confined,  as  a  rule,  to  the 
discount  of  bills  given  by  his  customers. 

The  only  payments  a  wholesale  merchant  has  to  make,  which 
aio  iibsolutely  imperative,  arc  the  customs  duties  and  freight 
on  imported  goods.  It  is  just  as  impossible  to  ask  credit  here 
u>  it  would  be  for  the  payment  of  wages.  But  no  wholesale 
iiKTcliiint  could  reasonably  think  of  commencing  business  with- 
out capital,  and  the  very  lowest  minimum  necessary  would  be 
ail  iijiount  sufficient  to  pay  the  duties  on  the  stock  requisite  to 
coiiinicnce  business,  and  thereafter  on  his  average  stock. 

Once  he  has  his  goods  in  warehouse,  he  can  begin  to  sell,  and 
with  such  facilities  as  bankers  are  now  ready  to  offer  for  the 
liishing  of  customers'  bills,  a  merchant  may,  from  a  financial 
point  of  view,  be  said  to  be  able  to  sell  for  cash.  Thus,  by  the 
time  the  payments  for  his  stock  become  due,  the  proceeds  of 
his  sales  ought  to  be  sufficient  to  meet  them. 

This  elementary  financial  theory  of  a  wholesale  business  be- 
comes modified  by  circumstances  as  time  progresses,  and  no 
prudent  man  would  be  satisfied  with  being  so  wholly  dependent 
on  his  credit  with  other  houses  as  to  have  nothing  left  over  after 
payment  of  duties. 

He  will,  of  course,  aim  at  having  far  more  capital  than  that. 
But  even  on  such  a  modicum  of  capital  as  is  indicated,  it  is 
clear  that  no  necessity  should  arise  for  loans  from  a  banker. 
From  all  which  the  rule  may  be  deduced  that  loans  to  a  whole- 


272 


BANKING    PUACTKE 


■■■i^ 


m^ 


sale  mcrclmnt  (as  distinguished  from  the  discount  of  trade 
bills)  should  he  considered  as  irregular  in  the  nature  of  things, 
and  only  to  he  granted  in  exceptiotial  circumstances. 

When,  therefore,  a  hanker  is  ap{»lied  to  by  a  wholesale  mer- 
chant for  a  loan  in  addition  to  a  discount  of  customers'  bills, 
he  is  put  upon  in<|iiiry  as  to  why  such  a  loan  is  required.     The 
reason  connnonly  given  is  that  goods  are  arriving  in  quantity 
in  the  Custom  House  and  that  the  duties  must  be  paid.     But 
this,  in  itself,  is  not  a  good  reason.     For,  as  has  been  observed, 
the  capital  of  such  a  house  should  be  sufficient  to  provide  for 
this   requirement.     The  payment  of  customs   dues   can  never 
take  a  merchant  unawares.     The  necessity  for  it  must  have 
been  seen  long  beforehand,  and  ample  opportunity  given  for 
making  provision.     An  application  for  a  loan  may,  therefore, 
indicate  that  purchases  have  been  too  heavy;  or  that  sales  are 
not  being  vigorously  pushed,  or  that  an  unsuitable  stock  has 
been  laid  in,  or  that  the  customers  of  the  house  cannot  be  de- 
ponded  on  for  payments.     Any  of  these  will  cause  the  finances 
of  a  wholesale  house  to  drag  heavily,  and  they  are  all  of  such 
a  character  as  to  make  a  banker  pause.     The  head  of  a  house 
may  naturally  be  unwilling  to  acknowledge  that  any  of  these 
suppositions  are  correct,  and  some  are  very  unwilling  to  talk 
to  a  banker  on  the  subject.     Yet  the  application  for  a  loan 
gives  him  the  right  to  make  inquiry;  for  experience  shows  that 
such  things,  if  allowed  to  go  or.  uncorrected,  may  be  the  begin- 
ning of  a  course  which  will  end  in  Insolvency. 

There  is  this  further  reason  for  a  banker's  caution  in  this 
matter,  that  a  dealer  in  imported  or  manufactured  goods  can- 
not give  a  banker  security  upon  them.  A  miller,  a  tanner,  a 
pork  packer,  can  pledge  his  product  as  security  for  advances 
under  the  warehousing  clauses  of  the  Banking  Act.  But  a 
wholesale  merchant  cannot  do  this  under  the  Act.  And  there 
is  reason  for  this  distinction  in  the  nature  of  things;  for  a 
wholesale  merchant's  stock  has  almost  invariably  been  bought 
on  credit.  The  goods  on  his  shelves  are  probably  not  yet  paid 
for.  It  would,  therefore,  be  contrary  to  every  principle  of 
equity  tc  allow  a  merchant  to  pledge  his  goods  for  advances 


CLASSIFICATIUN    OF    LOANS 


S7S 


«liilt'  »lie  clHiiiis  of  the  crcditurs  wore  unsatisfied.  Tliia  being 
tlif  tfisc,  it  has  become  a  practice  for  such  loans  to  be  applied 
for  witliout  security,  and  not  infre<iucntly  for  them  to  be 
^'niiitL'd  in  that  shape.  This  certainly  is  a  deviation  from 
sDiiml  banking  practice.  But  the  whole  system  of  loans  to 
HlioltHiile  merchants  is  exceptional,  and  requires  exceptional 
tnatiiKiit  at  the  hands  of  a  lianker. 

Tin-  character  of  that  treatment  may  be  indicated  as  follows: 
l'ii>t,  MO  regular  line  of  credit  shouhl  be  arranged  for  in 
It^[»(■(•t  of  loans;  that  is,  no  amount  which  a  customer  can 
ilwavs  have  at  his  connnand.  Second,  advances  should  be 
tniiporiiry ;  each  being  applied  for  on  its  own  merits,  with  the 
ixpl.iiiiition  of  circumstances.  Third,  they  should  only  be  al- 
lowed at  certain  seasons,  and  never  last  more  than  two  or  three 
iiioiitlis  at  the  most.  Fourth,  renewals  should  not  be  granted. 
Iiuhcations  of  continuance  should  be  carefully  watched  and 
promptly  dealt  with.  If  advances  become  chronic,  security 
should  be  insisted  upon.  Fifth,  it  is  always  desirable,  too,  that 
when  such  advances  are  granted  to  a  firm,  the  endorsement  or 
fiUfuantce  of  each  individual  in  it  should  be  obtained;  for  in- 
<livi(liiHl  partners  may  have  separate  estates  which  the  endorse- 
ment would  bind.  If  the  business  is  carried  on  by  a  joint-stock 
company,  the  guarantee  of  some  of  the  principal  stockholders 
would  he  desirable. 

By  the  observance  of  such  rules  as  these,  and  with  constant 
pxorrise  of  vigilance,  loans  of  this  character  may  be  granted 
without  unreasonable  risk. 


208.  Collateral  notes, — There  are  several  reasons  why- 
it  is  ometimes  preferable  to  make  advances  against 
notes  as  collateral  instead  of  discounting  them.  The 
borrower  may  perhaps  need  only  part  of  the  face  value 
of  the  notes  and  that  only  for  a  short  time.  The  quality 
of  tlie  paper  may  not  warrant  an  advance  of  more  than 
a  certain  percentage,  or  the  notes  may  be  of  a  longer 
ciineiicy  than  three  or  four  months,  beyond  which  time 

(•— VII 1—18 


m 


I    I 

I   '    f 

I    > 


HANKING    rUACTRi: 


i: 


a  imiik  is  loath  to  make  an  advance.    It.s  assets  must  be 
kepi  li({iii(l  atul  not  locked  up  in  lon^  time  loans. 

Tile  merits  of  a  note  tendered  as  collateral  should  be 
gauged  with  no  less  care  than  if  offered  for  discount;  a 
large  nominal  margin  may  he  delusive  and  hy  no  means 
an  ade(|uate  security.  Such  notes  should  he  scrutinized 
as  critically  as  cliscounted  hills,  and  rejected  if  defective 
in  any  vital  part.  If  notes  offered  hy  agricultural  im- 
l)lcmcnt  dealers  and  others  are  encumhered  with  condi- 
tions which  render  them  non-transferahic  they  should  k 
refused.  Lien  notes,  or  notes  secured  hy  lien  on  imple- 
ments, machinery,  and  other  movahle  equipment,  sold, 
should  only  he  taken  for  collections,  as  it  must  be  borne 
in  mind  that  the  maker  has  the  right  of  set-off  for  any 
legitimate  claim  against  the  vendor,  and  thiru  parties 
must  always  Ik-  prei)ared  for  something  of  this  kind. 

The  bank  in  making  advances  of  any  nature  has  the 
right  to  exi)ect  the  note  taken  to  be  free  from  any  irreg- 
ularity, and  in  accord  with  the  requirements  of  the  Bills 
of  Exchange  Act.  It  is  not  sufficient  that  a  bank  could 
probably  overcome  any  irregularity  by  proving  its  case; 
even  successful  litigation  is  objectionable,  and  invariably 
means  considerable  worry  and  some  loss  in  costs  and 
time. 

All  notes  taken  as  collateral  security  should  be  hy- 
pothecated to  the  bank  on  a  form  duly  signed  by  the  bor- 
rower ( Figure  61  or  78) .  The  form  Figure  61  can  also 
be  used  to  pledge  stocks  and  other  securities,  permissible 
under  the  Bank  Act.  The  attorney  for  a  customer  cannot 
liypothecate  collateral  Tiotes  unless  specially  empowered 
to  do  so.  All  collateral  hypothecations  should  be  con- 
secutively numbered  as  received  from  the  customers,  and 
filed  in  proper  order  in  the  vault. 

The  full  margin  of  good  collateral  stipulated  as  the 


/  3 


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IJANKINCJ    J'UACnCK 


H.I 


basis  for  any  credit  must  always  be  maintained.  A 
liberal  margin  will  generally  be  found  to  be  insufficient 
in  case  of  trouble.  The  margin  agreed  upon  in  all  cases 
sliould  be  calculated  on  the  amount  of  collateral  offered, 
and  not  based  on  the  amount  of  the  advance.  For  in- 
stance, on  a  margin  of  25  per  cent,  advance  $75  on  each 
$100  worth  of  collateral  (lei)osite(l.  Do  not  base  the  mar- 
gin (Ml  25  per  cent  of  the  advance,  which  in  the  above 
would  only  give  $93.75  collateral  for  every  $75  advanced. 

Overdue  paper  should  not  be  accepted  as  collateral. 

In  the  case  of  wholesale  accounts  obtaining  advances 
against  trade  paper  deposited  as  collateral,  it  will  be  nec- 
essary to  follow  the  account  as  closely  as  if  the  paper 
were  discounted.  For  this  purpose  the  blue  book  used  in 
the  discount  department  should  be  used  (see  Figure 37), 
and  an  account  oi)ene(l  iij)  for  each  obligant. 

In  all  cases  of  advances  against  this  class  of  security 
it  is  necessary  to  see  that  drafts  and  notes  which  are  re- 
turned unaccepted  or  unpaid  are  settled  for  eventually 
by  the  maker  or  drawee.  The  wholesale  surrendering  of 
these  returned  items  to  the  pledger  in  exchange  for  fresh 
collateral  drafts  should  not  be  permitted.  Under  no 
circumstances  should  unaccepted  drafts  which  are  lodged 
as  collateral  be  held  without  presentation  at  the  request 
of  the  pledger  or  for  any  other  reason. 

209.  Accommodation  paper. — Accommodation  paper 
is  most  dajigerous  when,  as  is  generally  the  case,  it  is 
carefully  concealed.  A  proof  of  a  banker's  sagacity  will 
be  best  seen  in  his  detection  of  the  accommodation  taint 
«  herever  it  may  exist,  however  dexterously  covered  up. 
and  in  keeping  clear  of  it  and  of  the  other  dangerous 
complications  and  contingencies  inseparable  from  it. 

Accommodation  paper  disguised  as  trade  bills  should 
be  looked  for  and  regarded  with  the  same  discrimination 


CLASSIFICATION    OF    LOANS 


277 


a[)i)lial  in  separating  spurious  coin  from  genuine.    Such 

jjaper  should  be  detected  if  a  manager  is  observant  of  the 

working  of  liis  accounts. 
Tlie  most  ordinary  kinds  of  accommodation  paper  are 

these  according  to  an  ohl  rule  book: 

(a)  Paper  floated  by  the  borrower  with  the  names  of 
his  friends  for  the  general  purposes  of  his  busi- 
mss,  say,  h  dry  goods,  grocery  or  hardware  busi- 
ness, or  a  manufacturing  business  of  any  kind. 
(h)  Paper  floated  by  the  parties  to  it  for  the  purpose 
of  going  into  some  si)eculation  outside  of  their 
legitimate  business.  They  are  induced  to  buy  or 
build  a  ship,  a  sawmill  or  factory  of  some  kind, 
a  farm,  a  mine,  timber  lands,  or  a  score  of  other 
enterprises. 

These  two  classes  of  accommodation  must  be  avoided 
at  all  Jiazards. 

(e)  Kenewals  of  notes  that  were  legitimate  enough  in 
the  first  instance  If  the  goods  they  originally 
represented  are  still  unsold  by  the  promissor,  the 
I)aper  may  still,  in  a  sense,  be  held  to  be  legiti- 
mate, although  even  in  that  case  the  renewal  is  a 
most  unhealthy  sign,  being  proof  of  over-produc- 
tion and  over-trading.  But  in  the  case  of  most 
renewals  they  have  lost  all  connection  with  the 
goods  they  originally  represented,  the  proceeds  of 
which  should  have  gone  to  wipe  the  notes  out  of 
existence  at  maturity.  The  proceeds  of  goods 
have  been  used  for  something  else,  and  the  notes 
remain,  representing  nothing.  This  is  accommo- 
dation of  the  worst  kind. 

There  is  no  more  significant  indication  to  a  banker 
^vll()  has  c>es  open  than  renewed  paper.     In  the  most 


iiTS 


BANKING    PHACTICK 


U 


llF^ 


favorable  view  you  can  take  it  shows  iniscaleulalion. 
Hut  in  most  cases  it  means  somethin^r  much  worse — gen- 
erally it  means  the  beginning  of  the  end. 

If  accommodation  ])ai)er  is  taken  at  all  you  should  be 
absolutely  certain  of  the  genuineness  of  the  signatures. 
The  danger  from  forgery  is  not  the  least  of  the  dangers 
attendhig  the  handling  of  this  objectionable  kind  of 
paper.  The  way  is  left  open  for  that  kind  of  fraud  when 
endorsed  notes  are  discounted  for  the  i)romissors,  but 
this  is  prohibited  in  most  banks. 

Never  overlook  the  consideration  that  if  you  take  an 
accommodation  endorsement  you  see  perhaps  less  than 
one-half  of  the  paper  afloat  bearing  the  sam  •  names. 
The  obligant  calls  for  a  quid  pro  quo,  the  accommoda- 
tion becomes  reciprocal,  and  likely  enough  develops  into 
a  network  of  cross  endorsements. 

210.  Overdrafts. — The  strong  objection  which  all 
banks  have  to  making  advances  by  way  of  overdrafts  is 
based  on  sound  principles,  which  are  not  generally  fully 
understood  or  appreciated.  The  principal  reasons  why 
this  form  of  advance  is  not  desirable  are  as  follows: 

(a)  That  it  does  not  fix  the  customer's  liability  as  in- 

disputably as  a  note  does. 

(b)  That  it  leaves  the  date  of  repayment  uncertain 
and  thereby  tends  to  encourage  laxity  on  the  part 
of  the  borrower. 

(c)  That  the  maintenance  of  an  active  account  in  the 
current  account  ledger  involves  an  actual  out-of- 
pocket  cost  in  the  matter  of  stationery  and  cleri- 
cal work,  and  it  is  important  that  the  average  free 
balance  in  such  accounts  should  be  sufficient  to 
afford  the  bank  a  }>roper  remuneration.  Ac- 
counts in  which  the  balance  is  frequently  reduced 
to  zero  or  converted  into  an  overdraft  are  not  of 


CLASSIFICATION    OF    LOANS 


279 


any  direct  value  to  a  bank.  It  is  farther  to  be 
borne  in  mind  that  accounts  which  from  time  to 
time  are  overdrawn  are  a  further  expense  through 
the  waste  of  the  time  of  tlie«managers  and  ledger- 
keepers  whenever  proper  authorization  has  to  be 
obtained  for  payment  of  a  check  creating  or  in- 
creasing an  overdraft,  as  all  such  checks  have  to 
be  referred  to  the  manager. 
(d)  No  customer  has  the  right  to  issue  an  order  upon 
a  bank  to  pay  money  which  he  has  not  at  his 
credit.  The  least  he  can  say  is  that  he  wishes  to 
borrow  so  much,  for  such  a  time,  so  that  the  man- 
ager may  decide  whether  1  le  money  will  be  lent 
or  not ;  otherwise  an  atteiiipt  is  made  to  borrow 
the  bank'smoney  without  its  consent. 

The  practice  of  issuing  a  check  without  having  any 
account  is  a  criminal  offense,  and  many  business  men  are 
ill  finor  of  placing  a  check  for  which  there  are  not  suffi- 
cient fi'.nds  in  the  same  category.  In  some  towns  the 
l)anks  make  a  practice  of  adding  10  or  15  cents  to 
each  check  returned  dishonored  from  the  clearing  before 
charging  it  to  the  endorser's  account.  This  charge  has 
heen  tV.und  to  have  a  deterrent  effect  on  the  practice,  and 
has  therefore  met  with  the  approval  of  the  merchants. 

An  overdraft  in  a  savings  account  is,  of  course,  absurd 
and  under  no  circumstances  should  be  allowed. 

As  a  matter  of  interest  it  may  be  noted  that  nearly 
every  state  banking  statute  in  the  United  States  has  a 
clause  making  overdrafts  an  offense.  Lawrence  O. 
Murray,  late  Comptroller  of  the  Currency,  among  other 
strictures  on  the  practice,  says  as  follows: 

Wliilc  the  National  Bank  Act  itself  is  silent  on  the  subject 
;>f  I IV,  n  I  rafts,  very  fortunately  the  question  has  been  before  the 


I 


i   ' 


fe 


I 


a 


280 


BANKING    PRACTICE 


4* 


SiipriniL-   Court   of   the    Uiiitid   States,   aiid    that    court   says 
that  the  grantin<r  of  overdrafts  is  a  misapplication  of  the  funds 
of  the  bank— a  tremendously  severe  indictment  of  the  practice. 
The  arraignment  by  our  Inghest  court  of  this  pernicious 
custom  is  such  a  scathing  one  that  I  wish  to  read  one  para- 
giuph   from   that  decision:  "A  usage  to  allow  customers  to 
overdraw  and  to  have  tlieir  checks  and  notes  charged  up  with- 
out present  funds  in  the  bank,  stripped  of  all  technical  disguise, 
the  usage  and  practice,  thus  attempted  to  be  sanctioned,  is  a 
usage  and  practice,  to  misapply  the  funds  of  the  bank;  and  to 
connive  at  the  withdrawal  of  same,  without  any  security,  in 
favor  of  certain  privileged  persons.      Such  a  usage  and  practice 
is.surely  a  manifest  departure  from  the  duty,  both  of  the  direc- 
tors and  cashier,  as  cannot  receive  any  countenance  in  a  court 
of  justice.     It  could  not  be  supported  by  any  vote  of  the  direc- 
tors,  however   formal;   and  therefore,   whenever  done  by  the 
cashier,  is  at  his  own  peril,  and  upon  the  responsibility  of  him- 
self and  his  sureties.     It  is  anything  but  'well  and  truly  execut- 
ing his  duties  as  cashier.'  " 

211.  Doubt  fuJ  pa  per.— A  most  important  duty  of  a 
manager  is  to  watch  carefully  how  every  note  he  has  dis- 
counted is  met  at  maturity.  Difficulty  and  danger  begin 
when  any  note  is  taken  up  by  the  borrower  instead  of  by 
the  promi  .sor. 

Should  any  borrower  be  allowed  to  drift  into  deep 
water  the  duty  and  responsibility  of  the  manager  de- 
mand that  he  set  himself  energetically  to  face  and  un- 
ravel the  difficulty,  in  such  manner  as  will  produce  the 
best  result  in  the  interest  of  the  bank.  Being  on  the 
spot,  the  manager  is  presumably  more  intimately  ac- 
quainted with  the  affairs  of  his  customer  than  any  other 
officer  of  the  bank.  He  is  expected  to  appreciate  fully 
the  responsibility  of  his  positif)n.  which  requires  that  he 
think  and  manage  for  himself,  exercising  his  own  judg- 
ment to  solve  any  trouble  which  may  occur  with  his 


CLASSIFICATION    OF    LOANS 


281 


iliciits.  Having  done  so,  the  course  he  considers  best  to 
he  |)ursiied,  and  the  reasons  therefor,  should  be  sub- 
mitted to  the  head  office.  INIerely  to  lay  the  matter  be- 
fore the  head  office  is  to  abandon  all  pretensions  to  man- 
ageniciit  and  stamp  himself  a  mere  clerk. 

At  the  country  branches  accommodation  transactions 
between  customers  and  the  wholesale  houses  in  the  com- 
niereial  centers  may  be  readily  detected,  by  the  evidence 
(if  a  check  from  the  drawers  to  retire  the  draft,  by  the 
retailer  having  an  unusually  large  deposit  when  an 
acceptance  falls  due,  or  by  drawing  back  upon  the 
wholesale  firm.  Any  such  evidence  or  suspicion  of  ac- 
eoiiiiiiodation  dealings  should  be  promptly  dealt  with. 

It  frequently  happens  that  country  customers  of  a 
l)ank  consign  gooti  to  the  commercial  centers  on  the 
solicitation  of  men  of  doubtful  character  and  financial 
standing,  who  are  unable  to  meet  the  drafts  when  pre- 
sented. The  mere  fact  that  the  relative  bill  of  lading  is 
to  he  surrendered  only  upon  payment  of  the  draft  does 
not  exclude  the  element  of  danger  from  such  a  transac- 
tion, either  to  the  bank,  unless  the  drawer  is  sound 
tinancially,  or  to  its  customer.  For  even  if  the  mer- 
chandise is  not  perishable  it  ])robably  has  to  be  sacrificed. 
The  negotiation  of  such  drafts  for  strangers,  or  visiting 
huyers  of  produce,  is  dangerous  in  the  extreme. 

It  is  advisable  to  restrict  loans  or  discounts  to  local 
customers  only.  Paper  offered  for  discount  by  parties 
resident  at  or  near  a  neighboring  banking  town  should 
l)e  declined.  If  a  man  cannot  discount  at  his  own  local 
itaiik  there  is  some  reason  for  it.  Although  seldom  done, 
it  is  an  excellent  plan  for  managers  of  different  banks  in 
!i  'listnct  to  compare  notes  on  borrowers  occasionally. 

Discounting  unaccepted  drafts  is  practically  making 
f»iie  nanie  advances  for  a  limited  duration,  but  always 


282 


BANKING    PRACTICE 


\H 


I  ",, 


with  the  risk  of  dishonor,  especially  if  the  drawer  is 
needy.  The  greater  the  need  the  greater  the  danger. 
This  class  of  j)aper  should  only  be  discounted  for  cus- 
tomers of  undoubted  standing. 

A  manager  should  never  lose  sight  of  a  debtor  whether 
judgment  against  him  has  been  taken  or  not.  Entire 
dependence  should  not  be  placed  on  a  bank's  solicitors, 
who  may  merely  perform  the  immediate  service  required 
of  them — that  of  taking  jud«jrment — and  if  a  debt  is  not 
then  recovered  follow  it  no  further. 


CHAPTER   VIII 

ADVANCES    ON    WAREHOUSE    RECEIPTS    AND 
ASSIGNMENTS 


1 


2]'2.  Sections  SG  and  Sfi. — Before  studying  the  special 
conditions  governing  a  bank's  advances  on  the  security 
of  merchandise,  etc.,  it  is  first  necessary  to  grasp  thor- 
ou<][lily  the  difference  between  security  afforded  by 
warehouse  receipts  under  Section  80  and  the  security  on 
a  loan  given  under  Section  88  of  the  Bank  Act.  The 
main  (hlference  is  one  of  the  possession  of  the  goods, 
namely,  constructive  and  actual  possession  of  the  security 
rcsj)ec'tively. 

iV(hances  on  a  warehouse  receipt  or  bill  of  lad- 
in<>-  can  be  made  to  ani/  person,  and  the  continued  exist- 
ence of  the  security  depends  upon  the  reliability  of  an 
iiulepeiulcnt  party,  the  warehouseman  or  carrier,  produc- 
tion and  surrender  of  the  warehouse  receipt  being  neces- 
sary to  obtain  the  goods.  Loans  of  this  kind  are  reason- 
al)ly  safe,  and  the  conditions  governing  them  are  very 
sJnij)le. 

In  the  case  of  advances  made  under  Section  88, 
1  low  ever,  the  conditions  are  much  more  complicated,  as 
aiKances  under  this  section  can  only  be  made  to  manu- 
facturers, and  wholesalers  dealing  in  certain  classes  of 
K'xxls,  the  continued  existence  of  the  security  depend- 
mfj  entirely  upon  the  probity  and  the  ability  of  the 
pledfier,  who  retains  possession  and  control  of  the  goods 

283 


= 


111 


284 


nANKIN(;    I'HACTKE 


tn 


liiinscir.  C'oi.saiuently,  u  Imnk  never  lends  money  under 
Section  88  unless  it  is  absolutely  eertain  of  the  honestv 
and  experience  of  the  eustonur.  Even  theti,  loans  of  this 
class  are  not  very  desirable,  owin^r  t„  the  technical  detail 
and  work  involved  in  their  .)|)eration.  There  is  always 
a  latent  risk.  JNIen  who  have  had  no  previous  expericm 
111  this  kind  of  business,  no  matter  how  competent  in 
other  lines,  are  not  good  credit  risks  for  this  kind  of  loan. 
They  should  furnish  good  endorsements  or  other  security 
in  addition,  until  they  have  shown  by  actual  exijeriemt 
that  their  operations  are  successful. 

Sections  8r,-00,  which  give  the  bank  special  privileges 
to  take  such  security,  are  based  on  the  i)rinciple  that  the 
security  nujst  l)e  taken  and  bear  the  same  date  as  the  ad- 
vances, for  which  it  is  taken,  thus  ensuring  that  the  assets 
of  the  borrower  will  be  increased  concurrently,  and  there- 
fore the  act  ^^  ill  not  in  any  way  operate  to  the  injustice 
of  any  creditor.  Conseciuently,  if  there  is  any  discrep- 
ancy  between  the  date  of  the  advances  and  the  date  of 
the  taking  of  the  security,  the  legality  of  the  latter  is 
voided  unless,  prior  to  the  advance,  the  bank  holds  a  writ- 
ten promise  that  the  security  woukl  be  given. 

It  must  always  be  borne  in  mind  that  banks  alone  are 
permitted  to  take  this  kind  of  security.  For  that  rea- 
son, it  is  necessary  when  making  advances  to  follow 
strictly  the  letter  as  well  as  the  si)irit  of  the  law.  Other- 
wise the  courts,  if  called  upon  to  adjudicate,  would  no 
doubt  render  judgment  against  a  bank.  The  whole  of 
this  system  is  more  or  less  a  novelty  in  business  practice, 
and  in  some  respects  may  act  contrary  to  established 
business  customs.  The  fact,  however,  that  there  have 
)>een  so  few  lawsuits  arising  out  of  such  transactions  goes 
to  show  that  the  system  works  well  in  practice,  and  that 
no  interests  ha\e  suffered,  notwithstanding  the  enormous 


KECEIPTS    AND    ASSIGNMENTS 


iho 


vdliimc  of  business  transacted.  The  conditions  govern- 
iii^r  the  classes  of  h)ans  under  Section  88  are  varied  and 
more  or  less  technical,  and  the  following  brief  descrip- 
tion is  intended  only  as  a  general,  rather  than  a  specific, 
cxi)lariation  of  some  of  the  more  important  features. 

•Jl.'}.  Section  86'. — Under  this  section  banks  are  per- 
mitted to  make  advances: 

To  iii\y  icholcnale  purchaser  or  ,shii>pcr  of  or  dealer  in  prod- 
ikIn  of  a<frifulturc,  tlic  forest,  quurry  iiiid  luiiic,  or  the  sea, 
likis  Jiiul  rivers,  or  to  any  wholesale  purchaser  or  shipper  of 
11-  (Kill  r  in  live  stock  or  dead  stock  or  tl-.e  products  thereof 
iilHiii  tlic  security  of  the  same. 

To  ;i  fanner  upon  the  security  of  his  threshed  grain  grown 
upon  flic  farm. 

'I'd  any  wholesale  manufacturer  of  goods  upon  the  security 
of  till-  goods  actually  nianufactur -I  by  hini  or  procured  for 
Midi  manufacture  (a  bank  may  not,  however,  lend  to  a  manu- 
ficturer  upon  the  security  of  any  goods  procured  by  him  to 
Ir'  sold  in  substantially  the  samo  condition  in  which  they  were 
rinived).  No  definition  of  the  term  "wholesale"  manufacturer 
])iii(liaser,  shipper  or  dealer  is  given  in  the  Act — in  fact,  it 
would  not  be  possible  to  define  the  term — but  no  difficulty  will 
I)i()l)ai)ly  arise  in  the  majority  of  cases,  as  the  dividing  line  is 
fjenerally  well  defined. 

A  correct  appreciation  of  the  intention  and  legal  effect 
of  the  forms  used  in  this  connection  nill  be  helpful.  Only 
one  loiin,  the  assignment  or  pledge  (Schedule  C),  is 
gi\iii  ill  the  Bank  Act.  All  forms,  however,  are  based 
on  a  correct  interpretation  of  the  act,  and  vary  but 
sli^lilly  ill  the  different  banks.  Among  the  more  impor- 
tant rorins  may  be  mentioned: 

1.  The  pled  if  c  or  assignment  of  goods  (Figure  62). 

2.  The  promise  to  give  security  (Figure  63). 

3.  The  contraci  with  the  customer  respecting  sales, 

insurance  of  goods,  etc.  (Figure  64). 


am 


HANKING    1»UA(TRE 


I 


4.  The  dccUiralion  by  tlic  custoincr  as  to  the  quantity 

and  value  of  the  produee  assigned  and  also  a 
statement  as  to  wages  and  other  privileged  elaims 
(Figure  O.'i). 

5.  The  note  ( Figures  0(5  and  ()7) .    To  he  used  with  all 

advanees  made  under  Seetions  8G-90. 

2U.  The  protulsc.—WhQW  advances  are  nuule  to  fa- 
eilitatc  operations  extending  over  a  season  or  for  a  cer- 
tain period  of  time,  as,  for  instance,  in  a  lumber  or  grain 
business,  it  is  obvious  that  the  bulk  of  the  security  will 
be  brought  into  existence  in  great  part  by  the  use  of  the 
bank's  money.  ^V  general  written  promise  to  give  secu- 
rity (Figure  0,3)  must  therefore  be  obtained  before  any 
advance  is  made,  and  pledges  or  assignments  of  goods 
should  l)e  obtained  as  often  as  any  property  constituting 
the  security  can  be  described  or  located.  In  addition  to 
"the  promise"  a  bank  generally  obtains  an  undertaking 
from  the  customer  (Figure  04)  regarding  the  insurance 
of  the  goods  in  question,  and  an  agreement  as  to  the  sale 
of  the  goods  in  ease  of  (l2fault  in  payment,  etc.  Further- 
more, each  note  form  refers  to  the  general  promise  and 
supplements  it  (Figure  00).  Casual  loans  are  made  on 
another  form  of  note  (Figure  07),  the  promise  being 
original  and  therefore  calling  for  particulars  of  goods 
and  location. 

It  must  always  be  borne  in  mind  that  the  "promise" 
is  not  in  itself  security;  it  is  simply  a  contract  to  give 
security,  and  can  only  be  enforced  as  a  contract:  in  other 
words,  it  is  an  equitable  assigimient  in  contradistinction 
to  the  pledge  which  is  a  legal  assignment  or  transfer  of 
property  actually  existing.  The  "promise"  confers  upon 
the  bank  no  legal  title  to  the  property  mentioned  in  it, 
and  until  a  legal  transfer  in  the  form  of  a  pledge  is  made, 


KECKH'TS    AND    ASSIGNMENTS 


287 


the  lK)rr()wer,  if  dishonest,  may  sell,  mortgage  or  other- 
wise (Ital  with  the  goods  intended  to  be  the  bank's  se- 
curity. The  penal  provisions  of  the  Bank  Act  are  not 
api)licable  to  equitable  assignments.  It  is  important, 
therelore,  to  obtain  an  assignment  as  soon  and  as  often 
as  there  are  goods  capable  of  being  transferred.  Under 
a  "promise"  the  bank  is  not  entitled  to  priority  over  un- 
paid vendors,  unseaired  creditors,  or,  in  fact,  to  any 
ifrcater  rights  than  the  customer  himself. 

It  is  important  to  remember  that  when  a  promise  to 
{five  security  does  not  exist,  a  bank  cannot,  except  under 
the  substitution  clause  of  Section  88,  claim  any  right  to, 
or  security  upon,  any  other  goods  than  those  pledged  at 
the  time  of  the  advance,  and  even  these  must  be  specially 
described  so  as  to  be  distinguished  from  others. 

Care  should  be  taken  to  have  the  written  promise  in- 
chide  each  class  of  product  on  which  it  is  at  all  likely  that 
the  bank  may  be  asked  to  lend  during  the  season,  and  all 
phices  where  the  customer  is  likely  to  store  or  warehouse 
goods. 

If  a  customer  desires  to  obtain  advances  upon  goods 
of  a  different  nature  from  those  covered  by  the  original 
promise,  or  if  the  goods,  whether  of  the  same  nature  or 
not,  are  stored  in  places  not  mentioned  in  the  original 
promise,  then  a  fresh  promise  should  be  taken  for  the 
amount  of  advances  required  under  the  new  conditions, 
and  a  separate  account  should  be  opened,  through  which 
must  ])ass  the  proceeds  of  all  advances  made  in  accord- 
ance with  the  terms  of  the  second  promise.  Under  such 
circumstances  the  proceeds  of  the  advances  made  under 
one  i)n)iiiise  must  on  no  consideration  be  used  to  repay 
advances  made  under  the  other. 

215.  The  assignment. — The  assignment  or  pledge  is  in 
the  exact  form  prescri!)C(l  by  the  Bank  Act  or  of  like 


iHH 


HANKINCi    rilAlTICH 


effect  ( Figure  02) ,  and  is  u  legal  trunsfer  to  tlic  hank  of 
the  title  of  tlie  eiistoiner  to  tin*  gcnxlH  <le.serihed  in  it.  A 
legal  ae(|uisition  of  valid  pledges,  uarelioiise  receipts  or 
hills  of  lading  confers  on  the  hank  priority  of  claim 
over  an  unpaid  vendor.  To  ohtain  title  it  is  necessary 
that  the  pledge  should  he  contemporaneous  with  the 
advance,  or  pursuant  to  a  written  promise  to  give  se- 
curity made  either  prior  to  or  at  the  time  the  advana 
is  made.  Where  assignments  are  given  in  connection 
with  a  general  or  continuous  promise  to  give  security, 
it  is  advisahle  to  include  all  goods  covered  by  previous 
assignments  given  under  that  promise,  hy  describing 
all  the  proi)erty  then  in  existence  and  in  the  customer's 
])ossession. 

In  filling  out  an  assignment  all  the  notes  representing 
the  total  advances  to  date  should  he  clearly  detailed  in 
the  blank  provided,  and  the  goods  and  the  places  where 
stored  should  be  «lescribed  as  definitely  as  possible. 

The  advance  from  the  bank  should  be  described  as  it 
actually  is  and  not  in  general  terms  such  as  "all  a;l- 
vances"  used  in  the  written  promise.  Assignments  must 
be  given  as  security  for  a  specific  loan  in  money,  or  for  a 
specified  promissory  note  or  notes. 

The  best  description  is  one  which  takes  in  all  goods  in 
a  particular  i)lacc,  such  as  the  following:  "all  the  logs, 
lumber,  lath  and  shingles  which  are  now  in  the  following 

place (s),  namely "    This  description,  if  the  place 

or  places  are  proi)erly  described,  would  leave  no  doubt  as 
to  what  goods  are  assigned.  It  would  transfer  the  goods 
to  the  bank  subject  to  whatever  claim  it  might  already 
have  under  previous  assignments,  and,  in  addition,  all 
goods  covered  by  the  description  that  had  been  added 
since  the  date  of  the  last  previous  assignment.  The 
svords  "except  previous  assignments  to  the  bank"  should 


HCI-UMTT    ONDKM  Hu      HH   FOB  t)«B  0«   MOKK    r«um«(MJ«»    NoTM 

h,  omiiileratlon  o(  »ilv»lWM  ol 

iloitan  m»d«  by  The  ('•BnUinn  n»nk  of  Comnwrf*  to 
ihr  „n,lcrM«n«J.  (or  which  Ihc  •aid  Bunk  hoU.  the  (ollowln«  bill«  .,r  note,  made  by  th« 
uml'T^iinml: 
N„tr,  ,lalrU  >(»■■      •  J"* l"l •  • 


Il.r.'  ilcvrilw  (iilly 
thi'  jiill*  or  Dotcs 
Ml  taken . 


Itiilr  nut  the  rli 
..(  prixliirtif,  etc  , 
mil  rnvrred  hy 
lliii  BMitnmrnt. 


the  prodiirta  i  f  nBrirultiirc,  tlir  forrnl,  .iimrry  nnd  miB« 

t.ie  priKlu<t<  o(  tlir  iM'O,  li»kr!«  ami  rJM n 

the  live  KlcM'k  or  drud  utofk,  or  ttir  i>riHl.ii  t»  thereof 

•'  -  ■oud»,  w«rpi  tt'id  mrrrhiindi«! 

■le  irsin 


mentioned  below  are,  i»  hereby  awi«ne<l  to  the  naitl  Bank  an  wrurity  (or  the  payment  o( 
the  .aid  bilU  or  note.,  or  renewal  thereof  or  «ub«titi.lio.i.  therefor  un.l  iulere-t  tl,ere..n. 

The  «ecurity  i.i  Riven  under  the  provi.iona  o(  Section  NH  of  the  Hank  Act.  and  i»  lub- 
j«t  to  the  provisioD'  o(  the  said  Act. 

The  Mid 


Rule  out  the  ela««e« 
of  prodiicln,  I'lc, 
I       nut     coveri'il     by 
this  aasikoment. 


product*  of  Biriculture,  the  forert,  <|uarry  and  mine 

produrtn  of  the  wii,  lakes  and  river» 

live  ntoek  or  <li'i>d  iiloik,  or  the  products  thereof. 

goodit,  wares  and  mcrchandis*! 

grain 


»rr  if.  now  owned  by  the  uodenigned  and  are,  is  now  in  the  posacssion  of 

and  are  is  (rMfrom  "any  mortgage.  Uen.  or  charge  thereon  (eiccpt  previoui  aaaignmenta 
to  the  Bank)  and  are  in 


Dcrribc  fully  the 
phici-  or  places 
nhiTC  the  goods 
arc 


situated.. 


snd  are  the  following.. 


!  Inipri  a«  full  dc- 
j  iinption  aspossi- 
I  hie  of  Roods  a»- 
I       signed,  c.  g..  logs, 

lumber.  wheat, 
j      fir.,  and  specify 

I  hi'    products   OQ 

h:iad. 


Dated  at.. 


..the day  of.. 


.191. 


N,  B.— If  necesaary,  for  want  of  space,  the  bills  or  notes  or  the  description  of  the 
goods  may  be  set  out  in  schedule  to  be  annexed,  in  which  case  insert  in  the  appropriate 
spares  the  words  "those  mentioned  in  the  schedule  hereto." 


FlorBE  62      ASSIGNMENT 

289 


C— VIII— 19 


'290 


RANKINCi    rilACTKE 


i. 


alwaj's  be  Icl't  in  the  form  when  there  are  previous  as- 
signments. 

Faihng  this  jieneral  deserijjtion,  the  security,  to  be 
good,  must  eotitain  such  a  definite  description  by  marks, 
location  or  otherwise  as  will  enable  the  bank  to  identify 
the  goods  without  question,  even  if  there  are  other  goods 
of  the  same  kind  in  the  same  place  not  assigned  to  the 
bank. 

A  clear  and  definite  description  of  the  place  or  places 
Av  here  the  property  is  stored  is  as  necessary  as  a  descrip- 
tion of  the  goods  themselves,  and,  indeed,  i.  an  essential 
part  thereof.  The  ])()nds,  yards,  etc.,  where  logs  and 
lumber  are  stored,  the  warehouses  about  a  mill  contain- 
ing flour  or  grain,  and,  in  fact,  all  the  places  in  which  the 
goods  to  be  assigned  are  situated,  must  be  descrilied  in 
such  a  way  that  there  can  be  no  doubt  which  particular 
l)laces  are  meant,  and  so  that  if  there  are  other  places  of 
a  similar  kind  belonging  to  the  customer  they  can  be 
clearly  distinguished.  Such  a  description  as  "my  mill" 
or  "my  elevator"  if  the  customer  owned  two  mills  or  two 
ele\ators  woidd  not  be  good.  If  the  customer  is  likely 
to  use  any  other  than  the  usual  storage  places  the  phrase 
in  the  written  promise  and  assignment  should  be  made 
wide  enough  to  include  these  also. 

It  is  to  be  noted  that  the  act  authorizes  a  bank  to  take 
assignments  of  goods  Avhethcr  in  the  possession  of  the 
ov  ner  or  not.  The  pledge  (Figure  (>2)  has  been  framed 
to  meet  customary  cases,  but  it  may  be  altered  to  suit  the 
circumstances  when  goods  are  in  possession  of  another 
j)erson,  as,  for  instance,  at  a  railway  station  where  the 
agent  cannot  grant  a  warehouse  receipt. 

Tile  goods  and  their  location  must,  of  course,  be  simi- 
larly described  in  both  the  written  promise  and  the 
assignment. 


u^i 


Tromise  to  Give  Wahehduse  Receipts  ob  Sectjritt  under  Section  88 
191 


TU  TUE  MANAOEB 


THE BANK 


Dkmi  Sir! 

Tlie  bank  is  hereby  requested  by  tlie  undersii^   •!  to  grant  and  continue 
during  the  current  season  a  revolving  line  ot    redit  for  m\,  our 

business  of 

iji ,  and  to  make  advances  to  th    iindorsign<'d  th'-eundcr  eith<!r 

'ly  way  of  overdi'aft  or  in  the  form  of  discoun,  i  ig  bills  and/or  notes  of  or  for 
the  undeisigned  on  the  security  of  all  the 


hereinafter  referred  to  as  "goods")  which  are  now  owned  or  which  may  be 
owned  by  the  undersigned  from  time  to  time  while  any  advances  made  under 
this  credit  remain  unpaid,  and  which  are  now  or  may  hereafter  be  in 


situated. 


\nd  the  undersigned  promise  and  agree  to  give  the  said  Bank  from  lime  to 
time  security  for  the  said  advances  by  way  of  assignments  under  Section  88  of 
the  Bank  Act,  coveiing  all  the  said  goods  or  part  thereof,  and/or  bills  of  lading 
acd/or  warehouse  receipts  for  goods  of  the  above  k'nds  or  some  of  them;  and 
you  or  the  Acting  Manager  for  the  time  being  are  hereby  appointed  the  Attorney 
of  the  undersigned,  to  give  from  time  to  time  to  the  Bank  the  security  above 
mentioned  and  to  sign  the  same  on  behalf  of  the  undersigned. 

The  Bank  may  from  time  to  time  take  from  the  undersigned  bills  and/or 
notes  representing  the  advances  in  whole  or  part.  Such  bills  and/or  notes  shall 
not  extinguish  or  pay  the  indebtedness  created  by  such  advances  but  shall 
represent  the  same  only. 

This  undertaking  is  to  apply  to  all  advances  made  to  the  undersigned  under 
the  said  line  of  credit,  the  intention  being  that  all  said  goods  which  the  under- 
signed may  from  time  to  time  have  in  said  place(s)  shall  from  time  to  time  be 
assigned  to  the  Bank  under  Section  88,  as  security  for  aU  advances,  and  that  all 
bills  of  lading  or  warehouse  receipts  covering  goods  of  the  above  kinds  which 
the  undersigned  may  receive  from  time  to  time  shall  be  given  to  the  Bank  as 
such  security. 

Yours  truly. 


FiGUBE  63 

201 


if 


I    i 


if 


i 


r 


Contract  with  Customers  Respecting  Warehouse  Receipts,  etc. 

IN  CONSIDERATION  of  the  advances  being  made  to  Ihe  u'-iersigned 
upon  the  security  of  warehouse  receipts  or  bills  of  lading,  or  upon  security 
under  Section  88  of  the  Bank  Act,  the  undersigned  consent  and  agree  with  the 
Hank  as  follows: 

1.  To  keep  the  property  covered  by  the  warehouse  receipts,  bills  of  lading, 
or  security  given  from  time  to  time,  insured  against  fire  to  the  extent  of  the 
advances  made  thereon,  or  to  the  full  insurable  value  thereof  in  case  such 
advances  exceed  the  insurable  value,  and  to  assign  the  policies  to  the  Bank 
(or  have  the  loss,  if  any,  made  payable  to  it).  Should  the  undersigned  neglect 
to  keep  up  such  msurance,  the  Bank  may  insure  and  hold  the  property  as 
security  for  the  premiums  paid  and  interest  thereon,  which  premiums  and 
interest  the  undersigned  will  pay  on  demand. 

2.  Any  sale  of  the  property  covered  by  any  such  warehouse  receipt,  bill 
of  la  ling,  or  security  under  such  Section  88,  given  or  which  may  be  given  to 
the  Bank  by  the  undersigned,  may  be  by  private  sale,  if  the  Bank  thinks  fit,— 
no  advertisement  or  public  notice  of  sale  or  intention  to  sell  need  be  given,— 
and  if  three  days'  notice  of  general  intention  to  sell  be  given  by  registered 
letter  mailed  in  the  Post  OflSce  and  addressed  to  the  undersigned  at  the  address 
last  known  to  <\e  Bank,  such  notice  shall  be  sufficient,  and  the  property  may 
be  sold  en  bl<K  or  in  smaller  quantities  either  by  public  auction  or  private  sale 
or  partly  by  each  mode,  at  any  time  after  the  expiration  of  such  period  without 
further  notice. 

This  is  to  be  a  continuing  consent  and  agreement,  and  is  to  apply  to  all 
warehouse  receipts,  bills  of  lading  and  securities  (and  the  property  covered 
thereby)  given,  and  which  may  be  given,  to  the  Bank  by  the  undersigned. 


Dated  at the- 


..day  of.. 


.,  191.. 


FiGxntE  64 


RECEIPTS    AND    ASSIGNMENTS 


293 


An  assignment  of  goods  is  continuous  and  follows  the 
relative  goods  through  all  processes  of  manufacture  until 
the  bank's  security  is  converted  into  the  finished  article. 

210.  The  declaration. — Every  borrower  under  this 
section  sliould  be  required  t  >  furnish  a  statement  at  least 
monthly,  even  if  estimated,  showing  what  stock  he  is 
holding  at  that  date  under  assignment  to  the  bank.   This 
declaration  (Figure  65)  is  of  importance,  because  if  a 
manufacturer,  the  pledger  may  have  changed  the  status 
of  the  goods  from  raw  material  to  manufactured  articles ; 
or,  if  a  dealer,  he  may  have  substituted  other  goods  in  the 
l)]ace  of  those  originally  pledged.    The  intention  of  the 
declaration  is  to  show  periodically  just  what  the  bank's 
security  is  at  stated  intervals.     It  also  keeps  in  the 
borrower's  mind  his  responsibility  to  a  bank,  and  would 
show  conclusively  to  a  court  that  a  bank  was  following 
these  goods,  according  to  the  spirit  of  the  act.     The 
form  also  contains  a  statement  as  to  the  amount  of  wages 
or  other  privileged  liens  on  the  goods. 

Particular  attention  is  directed  to  the  prior  rights  of 
wa^fe-earners  under  an  amendment  incidental  to  the  1913 
revision  of  the  act.  Even  if  the  customer  is  not  in  a  posi- 
tion to  give  periodically  the  information  regarding  quan- 
tities and  values  of  the  products,  etc.,  assigned,  the  state- 
ment should  nevertheless  be  taken  with  respect  to  wages, 
salaries,  and  the  like.  When  an  exact  inventory  is  taken, 
or  a  sufficiently  detailed  declaration  made,  it  would  be 
advisable  in  most  cases  to  utilize  it  as  a  basis  of  an  assign- 
ment. 

It  is  customary  to  make  an  examination  of  the  security 
pledged  at  irregular  intervals,  and  a  manager  should  at 
all  times  keep  himself  informed  as  to  the  fact  that  the 
security  is  fully  sufficient  to  protect  the  advances.  At 
the  same  time,  even  with  the  best  surveillance,  so  much 


t4 


<      W 

a     X 


*-     3    -a 


H      :: 


&.    r 


■r     c 


^     -S    _ 


I    1 


"2 


» 


i   ^   -J 


.t:     B    'S 

is       M     f 

»       =       ii 


5     5. 


SC       i, 


i"    '•S 


=       c     -= 


E    H    J     ^ 


e.     5    - 

^     c      S 


■5        =8 


3  a  C  M  5        J        — 

^   ^   ^ 


C         Sj 


.    -a     s! 


S      !? 


■3    :- 


a     -js 


to 


■=    -a.    H     "S 


»;      a 


?  r  ^ 


=     a 


& 


a 


t* 


s       =      ~ 


I    i 


c.     ^ 


•a     ^  "^ 

e  K 

3    -3  to 

=      J:  »: 

5  — 

^     -K  J 


■c      c 


~      5 


-    »  :3 

~   .5    1 


•!<       w 


C/j 


•9        -« 


394 


RECEIPTS    AND    ASSIGNMENTS 


295 


(Icpciids  on  the  intcj'rity  ol'  the  pledger  that  a  hank 
should  not  consider  making  advances  in  this  form  unless 
the  applicant  is  .  person  of  umpiestioned  integrity,  with 
a  previous  record  which  leaves  no  douht  on  the  suhject, 

III  making  advances  under  promise  to  give  security  it 
is  n  general  principle  that  the  money  the  hank  advances 
sliould  go  directly  into  the  creation  of  the  goods  intended 
to  he  pledged.  No  portion  should  be  diverted  to  any 
other  purpose.  This  is  an  important  matter  and  should 
he  checked  constantly,  even  if  it  is  necessary  to  make  a 
si)c(ial  visit  in  the  early  stages  of  the  operations.  The 
time  to  do  it  is  at  the  beginning  of  operations  before  the 
money  can  be  diverted  into  fixed  assets  or  plants. 

In  the  case  of  a  large  company  the  fact  that  the  funds 
have  been  placed  in  actual  production  is  often  an  intri- 
cate question  to  decide,  being  shown  by  the  concurrence 
of  several  lines  of  evidence,  the  scale,  inventory  sheets, 
state  of  the  books,  etc.  It  is  therefore  advisable  that 
there  should  be  an  understanding  that  these  are  open  to 
the  bank  if  it  sees  fit  to  send  an  auditor  at  any  time. 

Care  should  be  taken  to  see  that  all  workmen  and  arti- 
zaiis  are  paid  within  a  reasonable  time  and  that  no  privi- 
lejred  liens  for  wages  are  demandable:  in  fact,  that  no 
preferential  claim  exists  on  the  stock.  Full  insurance  in 
a  hank's  favor  in  satisfactory  companies  should  always 
he  held  upon  goods  and  the  policies  retained  in  the  bank's 
possession.     (See  Section  251.) 

Insurance  held  upon  goods  under  assignment  must 
not  be  regarded  as  effective  security  should  fire  occur, 
for  if  the  goods  were  not  there  to  be  destroyed,  the  in- 
surance company  would  not  pay.  The  loss  has  to  be 
proved.  It  must  not  be  assumed  that  the  existence  of  a 
])oli('y  of  insurance  is  any  evidence  of  the  existence  of  the 
merchandise  which  it  is  supposed  to  cover. 


/  / 


296 


BANKING    PRACTICE 


ii 


»?-.  ■ 


217.  The  note-  AJtlioii^li  an  ordinary  promissory 
note  form  can  be  used  in  coiijuMctioii  with  either  the 
promise  or  the  assignment,  it  has  been  found  more  con- 
venient in  practice  to  adopt  a  special  form  of  note  (Fig- 
in*e  OC  or  07) ,  with  a  promise  to  give  security  apjjended 
thereto.  Both  tiie  note  and  the  promise  require  to  be 
signed.  This  form  should  be  used  in  connection  with  all 
advances  under  Sections  86-88-90.  The  note  should  pref- 
erably be  drawn  on  demand,  as  then  the  original  note 
will  remain  current  in  the  possession  of  the  bank  until  the 
loan  is  retired.  When  taken  on  demand,  the  note  is  made 
to  read  with  interest,  which  is  collected  monthly.  If  ad- 
vances are  made  on  time  notes,  Ihey  will  have  to  be 
renewed,  and  the  old  notes  and  all  other  documents  re- 
tained, to  show  the  continuity  of  the  transaction.  The 
file  will  therefore  show  the  current  note  and,  attached 
thereto,  any  renewed  notes,  the  promise  (if  any),  the 
pledge  and  the  insurance  policies.  Where  an  account  is 
operated  under  a  general  promise  it  is  not  necessary  to 
repeat  the  descriptions,  and  a  note  similar  to  Figure  66 
is  used. 

218.  Making  advances. — Before  making  advances  the 
manager  should  be  able  to  answer  the  following  ques- 
tions: 

1.  Is  the  customer  a  wholesale  dealer,  manufacturer  or 

farmer  within  the  meaning  of  the  act? 

2.  Are  the  goods  of  a  character  which  can  be  held  as 

security  under  the  act  ? 

3.  Does  the  character  and  standing  of  the  applicant 

for  the  loan  entitle  him  to  consideration? 

4.  Has  he  had  sufficient  experience  to  ensure  a  suc- 

cessful outcome  of  the  transaction? 

5.  If  an  advance  on  the  warehouse  receipt,  is  the  ware- 

houseman unquestionably  reliable? 


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298 


BANKING    PRACTICE 


6.  Has  the  Imrrowcr  surticieiit.  means  to  su;)plement 

the  margin  on  the  goods  in  case  of  depreciation! 

7.  Are  there  any  unpaid  vendors  or  has  the  borrower 

hirge  outside  liabilities  which  might  lead  to  troii- 
hie  or  litigation?  Even  if  the  title  is  perfect,  the 
bank  may  be  called  upon  to  protect  its  possession, 
which  means  costs  and  trouble,  if  nothing  worse. 

8.  Will  the  insurance  requirement  of  the  bank  be  com- 

plied with? 

9.  If  a  farmer,  is  there  a  definite  understanding  as  to 

the  eventual  sale  of  the  grain? 
10.  Is  the  procedure  under  which  the  account  is  to  be 
conducted  perfectly  clear  to  the  customer  and 
the  bank  staff? 


If  these  questions  can  be  satisfactorily  answered  the 
manager  is  in  a  position  to  recommend  the  credit. 

Whenever  possible  the  property  upon  which  adA'ances 
are  to  be  made  should  be  examined  by  the  manager  with 
a  view  to  ascertaining  where  and  what  it  is,  and  he  should 
subsequently  be  able  to  identify  it  if  necessary.  The 
goods  must  be  particularly  described  both  in  the  promise 
and  the  assignment,  and  there  must  be  no  mistake  as  to 
where  they  are  stored. 

As  already  noted,  if  the  advances  are  to  be  continued 
during  a  season's  operations,  the  general  promise  and 
other  forms  should  be  taken  in  addition  to  the  note.  If 
the  advance  is  of  a  casual  nature  it  will  be  necessary  to 
take  only  the  note,  the  assignment  and  the  contract  in  re- 
gard to  insurance. 

A  reasonable  margin  should  be  maintained  at  all 
times,  depending  upon  the  class  of  security.  If  the  mar- 
gin will  permit  and  further  advances  are  subsequently 
necessary,  for  instance,  in  order  to  saw  logs,  for  the  pur- 


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BANKING    PRACTIC'K 


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chase  of  which  the  original  advance  was  made,  f>r  for 
additional  expenditure  in  nianui'aeturing,  it  is  permissi- 
ble to  make  additional  advances  and  take  additional 
assignments.  These  should,  of  course,  recapitulate  all 
the  security  in  the  original  assignment,  including  addi- 
tional goods,  if  any.  But  under  no  circumstances  must 
the  original  pledge  he  renewed,  the  goods  being  carried 
out  to  their  final  realization  on  each  j)ledgc  given. 

All  that  is  here  said  as  to  taking  assignments  applies 
equally  to  warehouse  receipts,  provided  these  cover  prop- 
erty which  is  clearly  a  portion  of  that  described  in  the 
promise.  There  could  be  no  doubt  on  that  point  if  the 
promise  is  to  give  security  by  assigimient  of  all  the  grain, 
etc.,  now  held  or  hereafter  held  bv  the  customer,  or  bv 
warehause  receipts  covering  the  same  or  any  part  there- 
of, as  the  printed  form  provides.  It  may  be  well  to  men- 
tion that  the  taking  of  the  subsequent  warehouse  re- 
ceipts or  assignments  referred  to  above  is  not  a  sub- 
stitution. The  customer  has  promised  that  he  will  from 
time  to  time  give  security  on  all  his  goods  for  all  his  ad- 
vances. The  subsequent  assignments,  therefore,  are  not 
substituted  for  previous  security,  but  are  given  in  addi- 
tion and  in  fulfilment  of  his  promise  to  give  security  on 
tbf*  particular  goods  covered  thereby. 

It  should  be  distinctly  understood  that  the  proceeds 
of  all  loans  under  Sections  86-90  must  be  used  by  the 
borrower  for  current  expenditure  in  connection  with  his 
business,  and  no  portion  of  it  must  be  a])plied,  either 
directly  or  indirectly,  in  settlement  of  any  previous 
existing  loan  to  the  bank. 

Although  not  essential,  it  is  found  more  convenient  in 
most  cases  to  have  two  accounts;  first,  the  customer's 
current  account,  from  which  his  regular  dirburscments 
can  be  made  and  to  which  proceeds  of  the  advances  under 


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BANKING    PRACTICE 


I'm 


this  section  would  be  credited;   second,  a  collateral  ac- 
count, into  which  all  the  proceeds  derived  from  the  goods 
pledged  should  be  credited  and  from  thence  applied  on 
the  loan.     By  this  method  of  carrying  collaterals  the 
same  rate  of  interest  may  be  credited  as  is  charged  on  the 
loan  on  which  it  is  finally  applied.    It  sh.iuld  be  noted 
that  an  overdraft  shoidd  not  be  permitted  in  the  cur- 
rent account  of  a  customer  borrowing  under  Section  88. 
219.  Warchoimc  rccciptx.—Tht:  bank  may  acquire  and 
hold  warehouse  receipts  and  bills  of  lading  as  collateral 
security  for  the  payment  of  any  debt  incurred  in  its 
favor,  but  it  is  necessary  that  the  warehouse  receipt  he 
acquired  at  the  time  the  advance  is  made  or  pursuant  to 
a  written  promise  to  give  security  made  prior  to  the  time 
the  advance  is  made.    Loans  may  be  made  by  the  bank 
to  atit/  person  upon  «////  goods,  wares  or  merchandise 
covered  by  warehouse  receipts  or  bills  of  lading.    In  lend- 
ing on  the  security  of  warehouse  receipts  or  bills  of  lad- 
ing it  is  not  necessary  that  a  customer  should  be  a  manu- 
facturer or  wholesale  shipper  or  dealer,  as  in  the  case  of 
advances  m^.de  under  Section  88. 

A  definition  of  a  warehouse  receipt  is  giver  in  Section 
2  (p.  312)  of  the  Bank  Act.  In  making  advances  on 
warehouse  receipts  an  ordinary  note  form,  or,  preferably, 
the  special  form  ( Figure  67)  can  be  used.  Although  the 
delivery  of  a  warehouse  receipt  constitutes  a  legal  trans- 
fer, it  is  generally  considered  advisable  to  take  an  ordi- 
nary pledge  or  to  use  a  special  form  (Figure  69).  Im- 
mediately an  advance  is  made  on  a  warehouse  receipt 
the  warehouseman  should  be  notified  in  duplicate  on  a 
form  similar  to  Figure  70.  One  of  these  he  signs  and  re- 
turns to  the  bank. 

220.  Substitution. — Section  88  of  the  Bank  Act  au- 
thorizes a  bank  to  allow  pledged  goods  taken  from  a 


HtrtiTiiEc-ATinN  or  Warehouhb  RRrciiTti  and/or  Bills  or  Lading 


WARKIiOLSE  RECEIPTS  and/or  BILLS  OF  LADING  ACQUIRED  BY 
THE BANK  u  CollmtenI  Security 


W/R  or  B/L 


Issuctl 


DcKription  of  Good* 


The  »i)ove-mentioned  Warehouse  Receipts  and/or  Bills  of  lading  are  to 
he  lit'ld  by  the  Bank  as  security  for  the  payment  of  the  indebtedness  of  the 

undir^ifmpd.  as  follows: 

Note  dated 191 ,  due 101 ,  |. 


nr  retiPwaUa)  thereof  or  gubstitution(s)  therefor,  and  interest  thereon. 

The  goods  covered  by  the  above-mentioned  securities  may  be  realized  by 
the  Bank  in  such  manner  as  may  deem  to  it  advisable,  and  without  notice  to 
the  undersigned,  in  the  event  of  any  default  iu  payment  of  !hc  said  indebted- 
ne^8.  The  proceeds  may  be  held  in  li  u  of  what  is  rcalize<l.  and  may  as  and 
when  the  Bank  thinks  fit,  be  appropriated  on  account  of  such  parts  of  said 
I  indebtedness  as  to  the  Bank  seems  best. 


FlOCBK  09 

SOS 


•}^ 


OBIOINAb 


THE. BANK 


19 


Dear  Sir: 

You  are  hereby  notified  that  the  Warehouse  Receipt  dated 

,  18. ,  given  by  you  to 

for 

of 

stored  in  your  warehouse  at 

was  on  the    day  of ,  19 

endorsed  over  to  The Bank  by  the  said 

Youwai 

therefore  hold  the subject  to  the 

order  of  this  Bank,  and  to  such  inst  uct'.ons  as  may  be  given  you  in  writing  by 
the  undersigned. 

Yours  truly. 


IfANAOER 


By  virtue  of  the  Bank  Act  the  above-mentioned  endorsement  vests  in  The 
Bank  all  the  rights  of  the  endorser  in  the  above- 
mentioned  poods,  and  I  ho  Warrhou.scman  is  rendered  responsible  for  the  ab- 
straction of  or  other  interference  with  the  said  goods  without  the  consent  of 
the  said  Bank. 


Figure  70.    NOTICE  TO  WAREHOUSEMAN 
804 


DUPLICATE 


THE BANK 


.19 


Doar  Sir: 

You  are  hereby  noiiticd  that  the  Warehouse  Receipt  dated 

,  19 ,  given  by  you  to 

for 

of 

stored  in  your  warehouse  at 

was  on  the day  of ,  19 

endorsed  over  to  The Bank  by  the  said 

You  will 

therefore  hold  the subject  to  the 

order  of  this  Bank,  and  to  such  instructions  as  may  be  given  you  in  writing  by 
the  undersigned. 

Yours  truly, 

MANAGER 

By  virtue  of  the  Bank  Act  the  above-mentioned  endorsement  vests  in  The 
Bank  all  the  rights  of  the  endorser  in  the  above- 
mentioned  goods,  and  the  Warehouseman  is  rendered  responsible  for  the  ab- 
straction of  or  other  interference  with  the  said  goods  without  the  consent  of 
the  said  Bank. 


I  herrhy  acknowledge  having  received  the  original  of  the  above  notice, 
Tlie  relative  warehouse  charges   have  been  paid  to 

19 


FiGUHE  70.    (duplicate)  notice  TO  WAREHOUSE    AN 


505 


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11 

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C— VIII— JO 


306 


BANKING    rilACTICi: 


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wholesaler,  purchaser  or  shipper  to  he  removed  and  other 
goods  substituted  therefor.  The  i)erniissiou  to  substitute 
is  aeeonipanied  by  so  many  restrictions  that  its  use 
should  be  avoided  wherever  i)()ssible,  and  never  allowed 
until  the  individual  conditions  have  been  looked  into  and 
the  proper  procediu'e  decided  on. 

It  is  imi)ortant  to  note  that  the  provision  for  substitu- 
tion is  in  the  first  instance  expressed  to  be  conditional 
upon  the  consent  of  the  bank,  and  though  failure  to  ob- 
tain such  consent  does  not  affect  the  validity  of  the 
security,  there  should  always  be  an  understanding  with 
the  customer  that  the  goods  should  not  be  removed  with- 
out the  bank's  previous  consent.  As  a  ride,  in  an  active 
account,  it  would  not  be  feasible  to  require  a  customer 
to  obtain  the  bank's  consent  to  remove  the  goods  for  each 
day's  shipment,  and  the  only  practicable  plan  appears 
to  be  to  have  a  general  understanding  with  the  customer 
( Figure  71 )  that  he  may  remove  goods  from  time  to  time 
and  substitute  others  of  the  same  character  and  equal 
value;  that  is,  of  course,  to  such  an  extent  as  the  pro- 
ceeds of  the  goods  removed  are  not  applied  directly  to 
reduce  the  advances. 

Under  the  system  of  taking  a  general  promise  (as 
well  as  a  promise  with  each  note  discounted)  to  give 
security  on  all  the  goods  which  the  customer  may  have 
from  time  to  time  in  certain  named  places,  and  taking 
assignments  at  frequent  intervals,  the  value  of  the  clause 
respecting  substitutions  is  not  important  in  many  in- 
stances. It  would  be  of  benefit,  however,  under  certain 
circumstances,  for  instance,  where  goods  have  been  re- 
moved and  others  taken  into  stock  subsequent  to  the  date 
of  the  last  assignment  and  the  borrower  failed  or  was 
seized  up.  In  such  a  case,  if  the  goods  were  of  substan- 
tiallv  the  same  character  as  those  which  they  replaced. 


191    ■ 

'PII£ BANK  pursuant  to 

s(>(  tion  88  of  the  Bank  Act  hereby,  until  this  provision  is  with- 
drawn, allows 

to  HMiiove  from  time  to  time  in  the  ordinary  course  of  business, 
for  llu"  purpose  of  delivering?  the  same  \h  jjurchascrs  thereof, 
the  products,  jjoods,  wares  and  merchandise,  live  stock  or  dead 
slo(  k  or  the  products  thereof,  or  any  portion  or  jwrtions  thereof, 
(.11  the  security  of  which  the  Bank  has  lent  or  may  lend  him/them 
money  inidcr  the  provisions  of  said  Section,  and  to  substitute 
respectively  therefor  other  products,  goods,  wares  and  mer- 
chandise, live  stock  or  dead  stock  or  the  products  thereof, 
respectively  of  substantially  the  same  character. 

For  The Bank 


MANAGER 


TiiK  uNDEnsiGNED,  in  consideration  of  ttic  foregoing  permission,  hereby 
,n;r.i.    .  with  The  Banlcnot  to  remove  any  of  the  said 

pri«luils,  gooiis,  wares  and  merchandise,  live  stoeli  or  dead  stock  or  the  products 
tlnroof,  in  rosiH-ct  of  which  the siiid  permission  is  given  otherwise  than  in accord- 
aiuf  thtrewith,  and  within  a  reasonable  time  from  any  such  removal  (what 
>hall  be  a  r(  iisonalile  time  in  each  and  any  case  to  t>e  determined  by  the  Manager 

f.irlhttimol)eir,B«f  The Bank  at — , 

wIkisc  (l.cision  shall  be  final)  to  substitute  respectively  for  the  products,  goods, 
wan-  and  merchandise,  live  stock  or  dead  stock  or  the  products  thereof  so 
rcnioviMl  other  gcHxls,  wares  and  merchandise,  live  stock  or  dead  stock  or  the 
priKJucls  thereof  respectively  of  su'istantially  the  same  character  as  and  of  not 
los  vahic  than  those  so  removed,  and  in  ease  of  breach  of  this  agreement  the 
iinl.r-iciird  agree  . .  that  the  said  Manager  may  during  the  continuance  of  such 
lina.  li  (Iciare  to  be  due  and  payal)le  all  moneys  owing  by  the  undersigned  to 
111.'  Hank  and  all  bills  and  notes  held  by  the  Hank  in  respect  thereof,  and  on 
Ml.  Ii  ilcdaration  In-ing  made  the  siiid  moneys  and  bi  Is  and  notes  shall  there. 
uiHin  Income  and  be  due  and  payable. 


I 


FiaijRE  71 
SIBSTITUTIOX  .\GREEMFA'T 

307 


.'J08 


BANKING    PRACTICE 


li- 


the bank  would  have  a  right  to  hold  them  under  the  last 
assignment. 

Si)eaking  generally,  it  may  be  said  that  the  benefit  of 
this  clause  will  be  most  felt  when  security  has  been  taken 
upon  any  stock  of  grain,  minerals,  logs,  live  stock,  etc., 
at  a  time  when  the  quantity  of  stock  is  at  the  highest 
point.  Tlic  removal,  with  the  bank's  consent,  of  a  por- 
tion of  the  goods,  and  the  substitution  of  other  goods  of 
the  same  character,  would  leave  the  assignments  applica- 
ble to  all  the  remaining  stock. 

It  will  l)e  observed  that  under  this  clause  the  right  to 
substituted  goods  will  not  depend  on  an  assignment  be- 
ing taken  after  the  substituted  goods  are  required,  but 
on  having  an  assignment  covering  the  original  goods  for 
which  the  new  goods  have  been  substituted.  This  is  an 
added  reason  for  keeping  all  the  assignments  until  the 
whole  of  the  advances  to  a  customer  are  cleaned  up  for 
the  season. 

221.  The  "current  season." — There  is  no  special  limit 
to  the  time  during  which  the  bank  can  hold  security  on 
goods  properly  assigned  to  it.  For  example,  an  assign- 
ment from  a  grain  customer,  dated  August,  would  be 
effective  in  the  following  year  provided  the  actual  grain 
which  was  on  hand  in  August  was  s^'ll  on  hand. 

The  question  of  the  season  is  one  which  involves  some 
difficulty  in  the  case  of  accounts  of  tanners  and  other 
manufacturers,  whose  business  goes  on  unbroken  from 
year  to  year,  so  that  it  is  hard  to  say  where  their  season 
begins  or  ends.  But  there  can  be  no  risk  in  making  the 
promise  apjdy  to  the  recognized  tenii  for  bank  credits— 
that  is,  one  year  following  the  date  of  the  promise  only. 
In  the  case  of  advances  which  are  not  retired  in  M 
within  the  year  it  is  advisable  to  act  on  the  theory  that  a 
general  ])romise  would  not  be  api)licable  to  advatices 


RECEIPTS    AND    ASSIGNMENTS 


300 


made  Jiflcr  the  expiration  of  llic  particular  season  of  the 
customer's  business  to  which  it  refers.  The  general 
promise,  however,  undertakes  to  give  security  by  way  of 
assignment  from  time  to  time  "while  any  advances  made 
iiiuler  this  credit  remain  unpaid,"  and  under  this  clause 
!i  hank  would  be  entitled  to  continue  taking  assignments 
tor  loans  carried  over  the  end  of  the  season  until  such 
time  us  they  are  entirely  cleaned  up.  Renewals  of  notes 
representing  advances  carried  over  the  end  of  a  season 
should  not  be  merged  with  notes  representing  new 
advances,  and  the  former  should  be  liquidated  first. 
It  is  not  necessary,  however,  to  take  separate  as- 
sionments  for  the  renewals,  if  any,  of  advances  carried 

over. 

\Miile  assignments  of  new  goods  may  be  taken  for  ad- 
vanees  carried  over  the  end  of  the  season,  and  while  the 
same  form  of  assignment  may  be  used  for  new  and  old 
advances,  the  proceeds  of  advances  on  a  new  season's 
account  should  not  be  used  to  liquidate  any  portion  of 
the  advances  carried  over  from  the  previous  season.  This 
ie(iuirement  can  best  be  observed  by  opening  new  ac- 
counts in  both  the  liability  and  deposit  ledgers  for  the 
new  season's  business,  and  keeping  the  old  season's  busi- 
ness entirely  separate. 

When  the  old  liability  account  is  fully  liquidated  the 
old  deposit  account  may,  of  course,  be  closed. 

Tt  should  be  borne  in  mind  that  the  object  aimed  at  in 
conducting  separate  accounts  is  to  make  sure  that  not  a 
single  dollar  of  the  indebtedness  which  existed  before  the 
IK  \v  promise  was  taken  is  jjaid  out  of  the  proceeds  of  the 
advances  charged  to  the  new  liability  account. 

222.  Default. — rrovision  is  made  in  the  Bank  Act 
(sub-section  3  of  Section  88)  for  the  sale  of  goods,  in 
case  the  l)ank  finds  it  necessary  to  realize  on  its  security, 


310 


BANKING    PRACTICE 


1  'J- 
■i 


owing  to  the  iioii-paynieiit  of  the  deht.  A  distinction  is 
made  between  i)roduets  of  the  forest  and  other  gocids. 
For  the  former  the  law  requires  that  thirty  days'  notice 
should  be  given  the  pledger;  if  it  concerns  other  goods, 
only  ten  days'  notice  of  the  time  and  place  of  sale  is  re- 
quired. In  both  cases,  however,  the  sale  must  be  by  pub- 
lic auction  and  after  due  advertising  in  at  least  two  local 
papers.  In  the  Province  of  Quebec  one  of  the  pajjcrs 
must  be  in  French.  If,  however,  tlie  consent  in  writing 
of  the  pledger  had  been  obtained  the  above  procedure  is 
unnecessaiy,  and  the  sale  can  l)e  proceeded  with  at  con- 
venience.    (Figure  64.) 

There  are  four  penalties  in  the  Bank  Act  which  refer 
particularly  to  Sections  86-90.  These  are  set  forth  in 
Sections  141-2-3-4.  A  bank  is  subject  to  a  fine  if  it  takes 
security  for  a  pre-existing  debt,  or  fails  to  comply  with 
the  requirements  of  the  act  in  connection  with  the  sale 
of  goods  in  case  of  the  default  of  the  borrower.  It  is  an 
indictable  offense  for  any  person  to  make  a  false  state- 
ment in  any  warehouse  receipt  or  pledge,  or  alienate  any 
part  of  the  bank's  security  under  such  pledge.  The  two 
latter  clauses  should  be  printed  on  the  warehouse  receipt 
or  otherwise  brought  to  the  attention  of  those  interested. 

223.  General  remarks. — The  whole  question  of  mak- 
ing advances  under  Sections  86-90  demands  careful 
study  of  the  act,  as  well  as  of  the  definite  instructions 
issued  by  every  head  office  on  the  subject.  Losses  are 
generally  made  by  banks  in  connection  with  loans  under 
this  section,  due  to  carelessness  in  the  details  of  taking 
the  security.  In  some  cases  banks  have  lost  their  rights 
to  the  security.  Security  taken  under  this  section  gives 
a  bank  preference  over  other  creditors  because  the  bank 
created  its  own  security  by  advancing  the  money,  and  in 
the  event  of  the  failure  of  a  customer  this  preference  is 


RECEIPTS    AND    ASSUIN.MENTS 


311 


almost  invariably  attacked.  11'  any  tiaws  exist  in  the 
security  a  bank  has  practically  no  defense.  Where  this 
class  of  security  is  taken,  therefore,  it  is  essential  that  the 
niocedure  be  strictly  in  accordance  with  the  legal  re- 
quirements, if  the  security  is  to  be  at  all  relied  on. 

The  most  important  thing  to  remember  is  that  the 
security  under  this  section  cannot  be  taken  to  secure  any 
pre-existing  debt,  and  to  obtain  title  it  is  necessary  that 
the  pledge  should  be  contemporaneous  with  the  advance, 
or  i)ursuant  to  a  written  promise  to  give  security  made 
either  prior  to  or  at  the  time  the  advance  is  made. 

When  a  manager  has  had  little  or  no  experience  in  this 
class  of  loan,  it  is  advisable  that  in  making  application 
for  the  credit  he  should  outline  the  necessary  procedure 
as  he  understands  it,  referring  to  the  forms  he  intends  to 
use  in  this  connection.  Head  office,  in  reply,  will  cor- 
rect or  confirm  his  conclusions.    Assurance  is  thus  made 

(louhlv  sure.  . 

Asalready  mentioned,  the  above  brief  explanation  ot 
this  important  class  of  loan  is  not  intended  for  direct 
application,  but  rather  as  a  general  commentary  on  the 
specific  instructions,  which  are  included  in  the  rule  books 
of  cverv  bank.  It  is  lioped,  however,  that  this  chapter 
will  i)rove  helpful  to  any  who  have  not  had  sufficient  op- 
portunity to  grasp  the  spirit  which  actuates  the  law. 

224.  interpretation  of  terms.— Vor  convenience  of 
reference,  the  clauses  of  Section  2  of  the  Bank  Act  gov- 
erning the  interpretation  of  terms  and  phrases  used  in 
Sections  8G-90,  inclusive,  are  given  below: 

(0  ''BUI  of  lading''  includes  all  receipts  for  goods,  wares  or 
UKrclmndise,  accompanied  by  an  undertaking  to  transport 
the  same  from  the  place  where  they  were  received  to  some 
other  place,  by  any  mode  of  carriage,  whatever,  whether 
h.v  land  or  water,  or  partly  by  hind  and  partly  by  water; 


'  i 

U 


312 


BANKING    PRACTICE 


(f)  ^"Furnivr'"'  inchulcs  the  owner,  occupier,  landlord  und  ten- 
ant of  u  furni; 

(g)  "Goods,  wares  and  merchandise'^  includes,  in  addition  to 
the  things  usually  understood  thereby,  products  of  agri- 
culture, products  of  the  forest,  products  of  the  quarry  and 
mine,  products  of  the  sea,  lakes  and  rivers,  petroleum  and 
crude  oil,  and  other  articles  of  commerce; 

(h)    "Grain"  means  wheat,  oats,  barley,  rye  and  flax; 

(i)  "Manufacturer"  includes  manufacturers  of  logs,  timber  or 
lumber,  maltsters,  distillers,  brewers,  refiners  and  pro- 
ducers of  petroleum,  tanners,  curers,  packers,  canncrs  of 
meat,  pork,  fish,  fruit  or  vegetables,  and  any  person  who 
produces  by  hand,  art,  process  or  mechanical  means  any 
goods,  wares  or  nii  .chandise; 

(1)  "Products  of  agriculture"  in  addition  to  the  direct  pnx'- 
ucts  of  the  soil  such  as  hay,  grain,  roots,  vegetables,  fruits 
and  other  crops,  includes  milk,  cream,  butter,  cheese, 
honey,  poultry  (dead),  and  eggs,  hides,  skins  and  wool, 
and  dried,  canned  and  preser\'ed  vegetables  and  fruits; 

(m)  "Products  of  *  *  *  *  the  forest"  includes  bark,  logs, 
spars,  railway  tics,  poles  and  other  timber,  shingles,  laths, 
deals,  boards,  staves  and  other  lumber,  and  the  skins  and 
furs  of  wild  animals ; 

(n)  "Products  of  *  *  *  *  the  sea,  lakes  and  rivers**  includes, 
in  addition  to  fish  of  all  kinds,  whether  fresh,  frozen,  salted, 
dried,  canned,  preserved  in  oil  or  otherwise  preserved, 
whales  and  seals,  their  oil,  skins  and  bone,  oysters,  lobsters 
and  other  crustaceans,  fresh  and  canned  or  otherwise  pre- 
served ; 

(p)    "Warehouse  receipt — " 

(i)  Means  any  receipt  given  by  any  person  for  any  goods, 
wares  or  merchandise  in  his  actual,  visible  and  con- 
tinued possession  as  bailee  thereof  in  good  faith  and 
not  as  of  his  own  property,  and 
(ii)  Includes  receipts,  given  by  any  person  who  is  the 
owner  or  keeper  of  a  harbor,  cove,  pond,  wharf,  yard, 


RECEIPTS    AND    ASSIGNMENTS 


313 


wurehousc,  shed,  storehouse  or  otlicr  place  for  the 
storage  of  goods,  wares  or  merchandise,  for  gooils, 
wares  and  merchandise  delivered  to  him  as  bailee,  and 
actually  in  the  place  or  in  one  or  more  of  the  places 
owned  or  kept  by  him,  whether  such  person  is  en- 
gaged in  other  business  or  not,  and 
(iii)  Includes  also  receipts  given  by  any  person  in  charge 
of  logs  or  timber  in  transit  from  timber  limits  or 
other  lands  to  the  place  of  destination  of  such  logs 
or  timber. 


-i^^^^^wi    " 


CHAPTER   IX 


BANK    COST    ACCOUNTING 


ill 


#h 


225.  Need  of  a  coat  system. — Practically  every  bank 
in  the  United  States  of  any  importance  has  installed  a 
system  of  cost  accounting  an<'  made  a  careful  study  of 
the  principles  involved.  In  Canada,  however,  very  little 
attention  has  been  given  the  subject  by  the  banks, 
although  in  almost  every  other  line  of  commercial  indus- 
try cost  accounting  is  given  thorough  consideration,  and 
in  fact  has  become  an  absolute  necessity  under  modern 
business  conditions. 

The  necessity  of  a  cost  system  to  a  bank  is  really 
greater  than  in  any  other  business,  owing  to  the  narrow 
margin  of  profits  on  the  gross  amount  handled  in  bank- 
ing, and  the  number  and  variety  of  services  rendered  by 
the  banks  to  their  customers  and  the  public  without  re- 
muneration. 

In  the  stress  of  competition  most  banks  overlook  the 
fact  that  every  transaction  made  for  a  customer,  no  mat- 
ter how  simple,  bears  a  basic  cost  to  the  bank.  They 
have  allowed  tlie  public  to  encroach  gradually  on  their 
legitimate  exchange  and  other  profits.  They  are  not 
only  rendering  a  great  many  services  for  nothing,  but 
frequently  at  a  loss  to  themselves.  The  public  has  been 
quick  to  grasp  this  weakness  of  the  banks,  and  has  natu- 
rally pressed  its  advantage  to  the  utmost. 

3U 


BANK    COST    At't'Ol'NTING 


315 


I'lilil  the  beginning  of  the  present  centmy  the  profits 
obtained  from  the  banking  business  were  large  enougli 
so  tlmt  tlie  loss  from  a  few  unprofitable  accounts  had  no 
appitriahle  effect  on  a  bank's  net  earnings.  Competi- 
tion, however,  has  brought  conditions  to  a  state  such 
as  has  existed  for  some  time  in  other  lines  of  business, 
so  that  it  has  become  more  and  more  necessary  that  all 
the  business  ha?\dled  by  a  bank  should  show  a  certain 
anioniit  of  profit,  or  at  all  events  not  be  transacted  at 
a  loss. 

The  development  of  a  new  class  of  business,  that  of 
small  and  unremunerative  checking  accounts,  the  vast 
increase  in  the  volume  of  checks,  the  tendency  to  carry 
active  checking  accounts  in  the  savings  bank  department 
and  the  constantly  increasing  cost  of  operating,  have 
made  the  analysis  of  the  profit  or  loss  on  individual  ac- 
counts an  absolute  necessity.  The  only  remedy  for  ex- 
cessive or  unintelligent  competition  between  Canadian 
banks  lies  in  an  accurate  knowledge  of  costs.  No  or- 
dinary argument  will  appeal  to  a  branch  manager  suf- 
ficiently to  restrain  him  from  offering  extra  inducements 
to  customers,  as  long  as  he  honestly  believes  that  he  is 
securing  such  business  at  a  j)roiit.  But  few  managers 
would  persist  in  offering  the  goods  or  the  services  of 
the  hank  for  less  than  cost  after  they  know  what  the 
latter  was. 

The  modern  banker  would  severely  censure  a  cus- 
tomer who  was  ignorant  of  the  manufacturing  costs 
of  his  goods,  or  who  was  unable,  in  discussing  an  unsatis- 
factory profit  and  loss  sheet,  to  state  whether  his  whole 
business  was  unprofitable,  or  whether  there  were  certain 
lines  he  was  manufacturing  at  a  loss,  which  should  be 
either  discontinued  or  the  weak  point  in  their  manufac- 
turiufT  or  selling  remedied.    Yet  the  banker  himself  is 


310 


bankim;  I'HACTici: 


hJ 


[II  ■ 

li'  '- 


luint'iilaMy  iicglctiriil  cil'  infonuulioii  of  this  w>rt  c-oii- 
ceriiing  his  own  business. 

It  should  prove  a  humiliating  retlcction  that  the  Imnks, 
the  most  indispensable  business  units  in  the  eouutrv.  art 
oiKTating  with  an  almost  utter  disregard  to  receiving 
adeipiate  profit  from  individual  eustomers,  and  are  evi- 
dently  content  to  trust  to  luek  that  the  business  as  a 
whole  will  carry  the  burden.  It  is  true  that  the  hanks, 
notwithstanding  this  handicap,  pay  dividends.  But 
these  dividends  are  not  at  all  conmiensurate  with  otiitr 
lines  of  business  requiring  less  ability  and  involving 
much  less  risk. 

With  expenses  constantly  on  the  increase,  and  with 
returns  for  banking  services  steadily  diminishing,  tlie 
banks  have  been  forced  to  study  seriously  the  reduction 
of  expenses,  both  by  the  introduction  of  efficient  and 
labor-saving  methods  in  the  work,  and  by  systematic 
study  of  costs,  with  a  view  of  adjustment  or  eliminating 
any  accounts  or  transactions  Mhich  have  hitherto  been 
done  at  a  loss. 

226.  Principles  of  cost  accomitinfr,—'rhere  are  a 
great  many  factors  entering  into  what  constitutes  a 
profitable  account  to  a  bank.  The  amount  of  credit  bal- 
ance maintained  is  not  the  principal  factor  to  be  con- 
sidered, but  the  i)er  item  cost  of  the  entries.  In  other 
words,  an  account  with  a  balance  of  only  $200,  with  a 
few  entries,  can  easily  Ire  more  i)rofitable  to  a  bank  than 
one  with  a  balance  of  $1,000  or  more,  but  with  a  large 
number  of  cheeks,  deposits,  and  outstanding  items. 

In  analyzing  accounts  the  following  questions  should 
be  answered; 

(a)  Is  the  account  producing  a  profit? 

(b)  Is  the  account  handled  at  a  loss? 

(c)  If  the  latter,  exactly  what  increase  of  balance  or 


BANK    lOST    ACCOUNTING 


817 


other  change  of  conditions  governing  the  account  will 
vkxutii.'  the  loss  to  a  proHtf  Though  ai»  accoiuit  nmy  he 
„ptralc(l  at  an  uiiparent  loss  it  frwiuently  htti>i)ens  that 
there  are  collateral  advantages  which  warrant  a  continu- 
ation of  the  arrangement. 

((I)   If  the  account  is  protitahle,  is  the  hank  justly 
tiititU'd  to  a  larger  profit  than  now  ohtained^ 

(i)    Is  the  depositor  entitled  t()  any  additional  con- 
irssionsf 

In  considering  these  points  the  following  are  axio- 
niatii". 

(a)   That  in  order  for  a  deposit  account  to  l)e  protit- 
ahle the  halance  must  he  a  credit  halancc. 

(I))  Any  account  is  profitahle  if  the  income  from  it 
exceeds  the  exiHjnse  of  keeping  it. 

(c)  That  in  determining  whether  or  not  an  account 
is  proHtahle  the  amount  of  credit  hahuice  maintained 
is  not  necessarily  the  principal  factor  to  ht  considered, 
and  that  in  determining  the  value  of  an  account  the 
amount  of  the  halance  is  of  secondary  consideration 
as  compared  with  the  per  item  cost. 

(d)  That  in  reviewing  an  account  the  minimum 
wecklv  credit  halance  is  the  one  that  determines  the  loan- 
ing value  of  the  halance.  Care  should  he  taken  to  dis- 
ciimii.ate  hetween  the  value  of  an  average  balance  and  a 
steady  halance;  the  former,  if  a  violently  fluctuating  nc- 
coiint,  is  valueless. 

(c)  Discounts  on  loans  and  trade  bills,  as  well  as 
interest  on  debit  balances,  should  not  be  taken  into  con- 
sideration in  this  coiujection,  as  the  net  discount  or  inter- 
est earned  Is  regarded  as  a  part  of  the  profit  accruing 
from  the  general  loanable  funds  of  the  bank,  and  can- 
not therefore  be  regarded  as  a  benefit  derived  from  an 


318 


HANKING    PRACTICE 


m 


ir  .■ 


individual  account,  which  receives  due  credit  for  the 
amount  of  halance  maintained  on  deposit. 

(f)  In  considering  unprofitable  accoui.  ..ic  point 
should  always  be  looked  into,  especially  in  the  case  of 
accounts  in  newly  established  branches,  and  that  is 
wlicther  the  actual  loss  to  the  bank  in  carrying  tiie  ac- 
count is  less  than  the  amount  of  fixed  charges  which  sucii 
account  is  carrying. 

(g)  General  conditions  of  policy  must  govern  a  bank 
in  the  consideration  of  cost  figures,  and  the  introduction 
of  a  cost  system  does  not  imply  the  elimination  of  this 
element,  but  it  does  mean,  however,  that  in  deciding  upon 
a  concession  in  any  individual  case,  the  bank  will  have 
an  exact  knowledge  of  the  costs  and  earnings  of  the  ac- 
count, and  will  know  exactly  what  it  is  granting  and  the 
actual  cost  thereof. 

(h)  It  is  important  to  bear  in  mind  that  an  appa- 
rently large  balance  is  not  necessarily  remunerative,  as 
it  may  be  partly,  wholly,  if  not  more  than  offset  by  items 
in  transit  or  process  of  clearing,  so  that  without  an  ac- 
curate analysis,  a  customer's  balance  as  it  appears  on  the 
ledger  may  be  a  very  deceptive  measure  of  the  value  of 
the  account. 

227.  Small  checking  accounts. — The  steady  increase 
in  the  number  of  small  current  accounts  is  becoming  a 
serious  problem  in  banking,  owing  to  the  difficulty  and 
expense  of  operating  them.  There  are  several  classes 
of  small  accounts,  some  of  them  desirable,  others  neutral, 
and  many  inidesirable.  A  consideration  of  the  origin 
and  intention  of  these  small  accounts  is  of  interest. 
Roughly  speaking,  they  may  be  divided  into  eight 
classes:  the  last  class,  No.  8,  liowever,  is  the  one  to  which 
particular  reference  is  made,  owing  to  the  per  item  cost 
with  no  compensating  bahujce  to  support  fixed  charges. 


BANK    COST    ACCOUNTING 


319 


1  A  balance  created  by  the  payment  of  notes  or  other 
itetns  collected  by  the  bank  for  a  customer.  These  ac- 
counts are  generally  closed  by  one  withdrawal. 

•>  Proceeds  of  discounts  credited.  These  accounts 
are"  generally  inactive  and  the  balance  left  comparatively 
small,  a  few  dollars  as  a  rule. 

:3.  Money  left  for  safe-keeping  and  generally  with- 
drawn in  one  amount. 

4  Funds  deposited  from  time  to  time  to  meet  certam 
payments   inactive,   and   generally   withdrawn   in  one 

amount. 

5.  Balances  of  subsidiary  business  accounts  of  large 
customers,  such  as  coupon  and  dividend  accounts,  pay 
check  accounts,  etc.,  the  checks  for  which  would  other- 
wise go  through  the  general  account;  therefore  a  mat- 
ter of  bookkeeping  convenience  to  the  customer,  and  as 
a  rule  a  convenience  to  the  bank.    Include  in  analysis  of 

jreneral  account. 

().  Private  checking  accour,  of  partners,  managers, 
and  other  officers  of  a  company,  and  occasionally  their 
wives.  These  accounts  are  generally  carried  wilhngly 
bv  the  banks  as  a  matter  of  courtesy.  Such  accounts 
freciuently  have  good  balances  in  the  savings  department. 

7.  Seasonal  accounts.  The  balances  of  these  accounts 
during  the  greater  part  of  the  year  are  generally  small, 
with  practically  no  entries,  and  represent  the  balance 
left  over  after  a  season's  operation  in  a  certain  class  of 
business,  such  as  agriculture  or  lumbering;  for  instance, 
jirain  buvers,  cheese  factories,  etc.  These  as  a  rule  mam- 
tain  satisfactory  balances  during  the  height  of  theu:  ac- 

tivitv. 

8.'  Small  checking  accounts  with  a  maximum  of  en- 
tries and  minimum  of  balance. 

Tiie  bank,  for  this  last  class  of  account,  practically 


320 


BANKING    PRACTICE 


,!l 


(    [ 


M 


II 


m 


■^■i 


acts  as  bookkeeper  and  saves  the  depositor  in  some 
instances  $5  or  more  per  month  in  that  connection.  Ex- 
perience has  shown  that  these  accounts  are  more  fruit- 
ful of  trouble  and  risk  to  the  bank  than  any  other  ac- 
counts, and  once  a  mislal  ^  is  made  the  loss  is  seldom 
recovered.  Forgeries,  raised  checks,  and  other  forms 
of  criminal  financing  are  frequent.  "Eternal  vigilance 
is  the  price  of  safety."  Beyond  the  personal  equation  of 
the  customer  and  his  good  opinion,  whatever  that  is 
worth,  there  is  little  or  no  value  in  these  accounts.  The 
balances  are  small  and  of  such  a  fluctuating  nature  that 
practically  100  per  cent  cash  reserve  has  to  be  carried 
to  meet  their  requirements.  Furthermore,  as  the  d^ 
posit"  would  probably  show  that  about  90  per  cent  of 
the  amounts  consist  of  checks  and  bills  redeemable  at 
other  banks  in  the  city,  there  is  in  many  cases  a  real 
overdraft  in  the  account,  pending  the  clearing  of  these 
items. 

The  entries  on  these  accounts,  credit  and  debit,  cost 
at  least  3  cents  apiece.  Accounts  of  this  character  take 
up  a  great  deal  more  of  the  time  of  the  manager  and 
staff  than  practically  any  of  the  desirable  accounts.  As 
a  rule  checks  are  issued  before  the  deposit  is  brought 
in,  and  frequently  it  is  necessary  to  call  up  the  customer 
by  telephone  in  order  to  protect  his  checks  from  protest. 

It  must  be  remembered,  however,  that  in  many  small 
branches  a  number  of  these  unprofitable  accounts  can 
be  carried  under  certain  conditions  without  any  actual 
money  loss  to  a  bank.  The  reason  for  this  is  obvious. 
A  small  branch,  especially  if  newly  established,  has  cer- 
tain fixed  charges  to  maintain  irrespective  of  the  business 
done.  For  several  years  after  opening,  it  has  men  and 
machinery  to  spare  to  handle  this  class  of  account  with- 
out any  additional  expense.    It  is  only  when  the  business 


BANK    COST    ACCOUNTING 


321 


lias  increased  and  more  men  and  office  accommodation 
are  rt(iuired  that  these  accounts  become  burdensome. 
This  explains  why  some  banks  advertise  for  and  encour- 
age small  accounts.  They  enable  the  manager  to  become 
aniuainted  with  his  neighbors,  and  frequently  a  small 
account  may  later  turn  out  desirable  or  bring  desirable 

connections. 

The  same  arguments  do  not,  however,  apply  tc  a  small 
savings  bank  account.  Such  an  account  is  not  intended 
to  be  checked  against,  and  should  have  practically  no 
expense  except  the  cost  of  opening,  calculating  the  inter- 
est, and  holding  the  reserve. 

The  tendency  to  check  against  savings  bank  accounts 
is  to  be  deplored  for  many  reasons.     The  banks  have  no 
machinery  for  handling  these  checks.    The  cost  amounts 
to  abort  6  cents  per  entry,  as  practically  every  signature 
has  to  be  looked  up  with  each  presentation,  the  pass-book 
called  for,  etc.;  moreover,  this  abuse  of  the  savings  bank 
account  is  an  open  door  for  forgeries  and  other  frauds. 
The  increasing  activity  in  the  savings  bank  business 
is  constantly  adding  to  the  expenses  of  that  department, 
o^ving  to  the  number  of  checks  that  are  now  bemg  issued 
on  the  various  accounts,  and  the  practical  elimination  of 
anv  notice,  or  deduction  of  interest  in  lieu  thereof.    No 
balik  can  afford  to  pay  a  higher  rate  than  3  per  cent 
under  present  conditions.    In  fact,  a  study  of  the  state- 
ments of  the  various  banks  in  Canada  graphically  dem- 
onstrates this  fact.  , 
It  will  be  conceded  that  6  per  cent  on  the  shareholders 
capital  and  reserve  is  not  an    exorbitant  rate  to  allow, 
and  after  deducting  this  from  the  net  profits  of  the  in- 
dividual banks  in  1912  only  three  would  have  been  able 
to  pav  4  per  cent  on  savings  bank  accounts  without  com- 
pletcly  wiping  out  their  profit  and  loss  account,  and 

C— VIII— 31 


323 


BANKING   PRACTICE 


leaving  a  lieavy  deficit.  These  three  banks  are  those 
whose  savings  bank  deposits  are  relatively  small  com- 
pared to  their  capital,  being  in  the  ratio  of  only  about 
three  to  one.  Out  of  the  same  banks  only  seven,  in  ad- 
dition to  the  above  three,  could  afford  to  pay  31  per 
cent.  Of  these  seven,  a  few  are  able  to  pay  because  of 
the  small  ratio  of  their  deposits  to  their  capital,  but  in 
the  majority  of  cases  they  are  banks  who  have  a  large 
amount  of  ordinary  deposits  and  other  free  balances. 
Even  these  banks  would  have  remaining  a  balance  of 
profit  totally  inadequate  to  meet  their  usual  appropria- 
tions for  depreciation  and  other  contingencies,  and  cer- 
tainly nothing  to  set  aside  for  reserve. 

228.  Branch  expenses. — A  service  whieli  the  Cana- 
dian banks  render  the  country,  and  which  is  usually  but 
poorly  appreciated,  is  the  branch  service.  It  speaks  well 
for  their  progressiveness  iu  this  connection  when  the 
number  of  branches  is  compared  with  those  of  Great 
Britain  or  elsewhere.  According  to  the  Bankers'  Mag- 
azine, during  a  recent  five-year  period,  Canadian 
branches  were  increased  50  per  cent  while  in  Great  Brit- 
ain the  increase  was  only  15  per  cent.  Furthermore, 
these  statistics  show  tliat  Great  Britain  has  one  bank 
for  every  5,116  inhabitants,  while  Canada  has  one  for 
every  2,847  people.  Thus,  according  to  population,  the 
bank  offices  in  Canada  are  nearly  double  those  of  Great 
Britain,  and  it  must  be  remembered  that  the  Canadian 
banks  open  branches  under  a  great  deal  heavier  expense 
and  more  inconvenience  than  their  English  confreres, 
and  a  branch  is  more  likely  to  remain  an  expensive  bur- 
den in  Canada  for  a  longer  period  than  a  similar  branch 
in  the  old  country.  There  are  few  villages  in  England 
which  cannot  show  a  fair  proportion  of  affluent  residents 
either  living  in  the  village  or  occupying  the  neighbor- 


BANK    COST    ACCOUNTING 


323 


ID? 


,„.  country  houses,  whereas  in  Canada  a  new  branch 
aciierally  means  more  loans  than  deposits  to  start  with. 
Were  it  not  for  the  circulation  privileges  the  expense 
would  be  a  serious  deterrent  to  the  practice  of  opening 
„|)  branches,  especially  in  newly  settled  localities. 

It  has  been  advanced  that  there  is  a  great  economy  in 
tlie  l)ianch  system  in  the  fact  that  there  is  only  one execu- 
ti\e  for  a  large  number  of  branches  as  compared  with 
the  indivi     al  executives  required   for   the  American 
national  oanks.     This  economy,  great  though   it   is, 
is  partly  offset  by   the   increased   cost   of  operating 
branches,  owing  more  particularly  to  the  non-concentra- 
tiou  of  the  clerical  work.    In  other  words,  a  teller  or 
lidger-keeper,  for  instance,  in  a  big  office  can  easily  put 
tlnou<rh  four  or  five  times  more  work  than  he  would  be 
called  upon  to  do  in  a  smaller  office.     This  statement 
is  substantiated  by  figures  the  writer  obtained  from  one 
of  t'-e  leading  American  banks  where  for  the  past  ten 
years  tlie  average  number  of  men  per  million  dollars  de- 
imsited  has  held  steadily  at  about  four  and  six-tenths, 
whereas  Canadian  banks  average  twelve  or  thirteen  men 
))er  million  dollars  of  deposits. 

Very  interesti.ig  statistics  concerning  the  business  of 
a  branch  can  be  derived  from  the  books.  A  progressive 
record  of  all  useful  data  should  be  made  and  compared 
either  annually  or  semi-annually,  such  as  total  turnover, 
nunil)er  of  items  passing  through  the  different  depart- 
ments, number  and  aggregate  salary  of  men  employed, 
amount  of  stationery  used,  average  amount  of  deposits 
and  loans  for  the  year,  etc.  These  figures^  ire  generally 
called  for  by  the  head  office,  but  in  any  case  their  com- 
parison with  previous  years  are  invaluable  to  a  branch 
manager  who  aims  to  keep  expenses  within  a  proper  ra- 
tio to  tbe  business  transacted. 


324 


UANKINd    rHACTICi: 


As  the  main  l\ork  in  an  office  consists  in  handling  the 
loans  and  deposits,  a  simple  but  valuable  test  of  this 
ratio  is  to  find  the  percentages  which  salaries  and  ex- 
penses bear  to  the  combined  total  of  the  average  loans 
and  dei)osits.  It  is  interesting  to  note  how  sensitive 
these  percentages  are.  Any  change  over  the  previous 
year  or  half  year  can  be  accounted  for.  An  increase, 
for  instance,  in  the  expense  percentage  over  the  previous 
year  would  probably  be  due  to  some  extraordinary  ex- 
penses for  repairs,  or  the  like.  An  increase  in  the  salary 
percentage  might  show  that  the  staflP  employed  was 
getting  more  expensive  than  the  business  warranted,  and 
steps  should  be  taken  to  exchange  for  lower  salaried  men 
where  possible. 

The  normal  tendency  of  both  percentages  is  con- 
stantly downward.  Every  upward  movement  should  be 
inquired  into  closely. 

229.  Inland  ed'chan^c. — The  transfer  of  funds  l)e- 
tween  banks,  or  from  one  branch  to  another,  is  a  serious 
source  of  expense,  a  fact  which  is  frequently  overlooked 
by  the  banks  in  attempting  to  meet  competition,  and  the 
demand  of  the  public  for  "par  facilities." 

Roughly  speaking,  out  of  every  $100  deposited,  over 
$90  consists  of  checks;  the  balance  consists  of  bank  bills 
and  legal  tenders,  the  si^ecie,  excepting  in  special  cases, 
being  negligible.  All  the  cost  of  the  special  machiner}' 
required  for  the  handling  of  this  vast  volume  of  checb 
and  drafts,  for  their  transfer  from  bank  to  bank  in  the 
same  city,  or  in  outside  cities,  is  borne  by  the  banks, 
locally  without  any  remuneration,  and  in  the  case  of 
outside  transactions,  at  a  charge  frequently  insufficient 
to  cover  the  actual  exj>ense  involved.  True,  this  one 
feature  may  be  considered  but  a  small  part  of  a  bank's 
business.     It  is  usually  looked  upon  as  one  not  worth 


BANK    COST    ACCOUNTING 


325 


,„„si.kri..}A-.  Yet,  in  acting  as  a  clearing  house  in  this 
conncrtion,  the  hanks  of  Canada  reiuler  an  uiestimable 
service  to  the  country,  at  a  cost  of  millions  of  dollars  an- 

""'riie  average  amount  of  outstanding  items  held  over 
„i.,l,t  for  the  daily  local  clearings  of  the  Canadian  banks 
is  over  $70,000,000,  and  offsets  nearly  three-fourths  ot 
the  average  circulation  of  the  banks.  At  6  per  cent  in- 
terest it  represents  over  $4,000,000  annually.  In  addi- 
tion to  local  clearings  there  is  a  much  larger  amount  of 
items  in  transit  between  branches  and  correspondents, 
some  of  which  business  is  transacted  at  a  loss. 

\  customer  of  a  Toronto  bank,  for  instance,  meets  a 
„„te  l.v  depositing  a  check  drawn  on  another  bank  in 
rnn.Mto;  interest  stops  when  the  note  is  charged  up  to 
],is  account.  But  his  bank  does  not  receive  returns  for 
the  check  through  the  clearing  until  the  following  day, 
u  loss  of  one  dav's  interest.  If  the  check  had  been  drawn 
„n  a  hank  in  ]\Iontreal  it  would  be  two,  or  in  some  cases 
three,  (lavs  (where  Sunday  intervenes)  before  the  branch 
at  Montreal  receives  clearing  returns  for  the  item.  Even 
if  the  check  were  onlv  for  $100  the  loss  at  6  per  cent 
would  amount  to  over  31  cents.  Roughly  speaking,  a 
(hivs  interest  at  6  per  cent  is  equivalent  to  a  little  over 
one  sixtv-fourth  of  1  per  cent.    It  is  important  to  bear 

in  mind  that  a  check  or  sight  draft  outstanding  seven 
(lays  has  exhausted  the  ecpiivalent  of  one-eighth  of  1  per 

cent  in  interest  alone. 
In  making  an  exchange  charge  to  a  customer  there 

are  three  elements  of  expense  to  be  considered  and  ad- 

justed  to  meet  the  special  conditions  of  the  customer  s 

Inisiness,  namely : 

1.  Postage  and  the  actual  cost  of  stationery,  clerical 

work,  etc. 


326 


BANKING    PRACTICE 


*  if 

Iff 

If' 


I 


it  i 

m 


2.  Interest  for  the  time  outstanding.* 

3.  (a)   If  a  branch:  the  cost  of  the  ultimate  transfer  of 
funds  between  branches, 
(b)   If    a    correspondent:    the    actual 
charge. 

4.  Profit  to  bank. 


commission 


The  first  three  clauses — expenses — are  incurred  in 
connection  with  every  transaction,  whether  with  a 
branch  or  correspondent  or  whether  put  through  at  par 
or  not,  and  it  is  advisable  for  every  branch  to  test  out 
its  exchange  charges  on  the  above  basis,  and  see  if  the 
bank  is  being  fully  remunerated  for  its  services.  As  an 
example,  we  shall  work  out  the  details  of  handling  a 
check  between  two  such  important  centers  as  IHontreal 
and  Toronto. 

Take  a  check  for  $100  cashed  in  Toronto: 

Office  and  postage  charges 2         cents 

Interest  for  time  outstanding  (2  days)  at  6% .   3 .  288  cents 


Total  cost 5.288 cents 

In  other  words,  a  check  for  $100  between  the  two 
branches  costs  approximately  5i  cents. 

It  may,  of  course,  be  advanced  that  a  bank  is  not  out 
any  interest  when  the  check  is  between  two  customers 
of  the  bank  at  different  branches.  This  is  true  where 
the  account  of  the  drawer  is  in  funds  at  the  time  the 
check  is  cashed.  But,  theoretically,  the  transaction  must 
be  dealt  with  as  it  concerns  each  customer  and  each 
branch. 

Xo  merchant  would  sell  an  article  at  a  loss  to  one  cus- 
tomer simply  because  he  expected  to  make  a  sale  to  an- 
other customer  at  a  profit. 

'  The  time  element  in  clause  2  i.s  frequently  overlooked,  with  the  consequent 
absorption  of  the  profit  into  expense. 


BANK    COST    ACCOUNTING  327 

Tliere  is  a  tendency  on  the  part  of  some  customers  to 
expect,  almost  as  a  right,  all  sorts  of  par  privileges  and 
concessions  from  their  banks,  presuming  on  the  fact  that 
the  i)aiik  would  be  sorry  to  lose  a  good  account.  Ihis 
is  a  peculiar  trait  in  men  who  are  otherwise  honorable 
and  tree  from  petty  motives.  If  a  bank  manager,  ui 
buying  goods  from  one  of  these  same  customers,  tried 
regularly  to  beat  down  the  price,  or  expected  to  get  all 
small  wares  for  nothing  because  they  did  not  cost  much, 
what  would  the  merchant  say? 

The  foregoing  figures  would  apply  to  a  check  remitted 
any  other  branch,  with  the  change  in  the  time  only. 
Should  the  item  be  sight  instead  of  a  check  the  mterest 
pel  U)d  would  be  increased  to  seven  days,  or  7-64,  ap- 
proximately 11  cents. 

A  collection  sent  to  a  correspondent,  however,  has  to 
stand  a  double  charge  in  the  interest.  Take  a  check  for, 
say,  $100  sent  from  Toronto  to  Carleton  Place,  the  cost 
would  be  as  follows: 

Office  charges  and  postage  ••■•••,<*         **"*' 
Interest  for  time  outstanding  Carleton  riace 

and  return,  2  days,  at  6%. . . .  ^6.575  cents 

Remittance  sent  to  Montreal,  2  days. .  ..  . ) 
Exchange  charged  on  check  by  correspond- 

ent  at  Carleton  Place ^0         ^"^ 

Total  cost 18.575cents 

If  25  cents  was  collected  on  this  item,  the  bank  gets 
a  p.o<it  of  6  cents,  which  is  little  enough.  Had  this  been 
a  sight  item,  the  bank  would  have  lost  3  cents  or  more. 
Of  course,  amounts  below  the  hundred  on  which  a  mini- 
mum is  charged  help  in  improving  the  average  profit. 

A  small  table  (Figure  72)  showing  the  approximate 
time  and  interest  cost  to  various  parts  of  the  countrj'  to 
and  from  a  branch  will  greatly  assist  in  these  calcula- 


AVEKACiK   TlMK   OcrrPIED   IN   C'LEAIUMi    BkTWKKN    HnANTIIt:!^ 


i  *  1 


"it 


<li 


Nova  S<'<)tiu. 
I'rince  K<l\v.  l>\. 
New  Hri'n.twick. 

Qiiflni- 

Ontario 

ManitolM 

Saskatchewan . 

Albfrta 

BritLshrulunibia 


N.S. 


U 
5 
V, 
(I 
7 


V 

K 

I. 

N.  B. 

:l 

< 

I 

i 

;! 
.1 

1 

c 

.) 

1 

(i 

4 

7 

i)w. 

(hit. 

Man. 

Susk. 

AlUi. 

H.< 

7 

.'} 

t 

0 

0 

0 

a 

4 

U 

U 

(! 

7 

:j 

:« 

U 

(i 

(i 

7 

< 

^ 

5 

li 

U 

7 

4 

'.' 

4 

,'. 

.> 

(! 

4 

1 

^ 

.'1 

a 

•> 

« 

.) 

:j 

:i 

4 

J 

,j 

.) 

:j 

:< 

4 

a 

7 

(i 

5 

J 

4 

:< 

X  V 


1  day's  intprcst  at  fl'^  =  1/Ct,  approximately. 

Tlien'fopi',  the  ii.sl  of  inten-st  (sjiy)  Iwtween  points  in  Ont.irio  and  ManltnU 
is  4/(54  =  1/10,  if  sent  to  a  corn-sponth-nt  the  item  would  be  8  days  outstanding. 
or  8/ft4  =  y^  of  1%  for  interest,  as  it  would  lake  the  same  lime  to  clear  the  return 
remittance. 


Interest  on  $1,000 


Days 

2% 

-^yrc 

O'o 

Decimal 
\'ulue.s  ol 

64th.s 

l/32n(l.s 

1 

.0548 

.  1233 

.1644 

. 15625 

1 

2 

.1096 

.2466 

.3288 

.3125 

2 

1  32 

3 

.  1(544 

.3699 

.4932 

.46875 

3 

4 

.2192 

.4932 

.6575 

.625 

4 

1/16 

5 

.2740 

.6164 

.8219 

.78125 

5 

6 

.3288 

.7397 

.9863 

.93750 

6 

3/32 

7 

.  3836 

.8630 

1 . 1507 

1.09375 

7 

1  10 

8 

.4384 

.9863 

1.3151 

1.250 

8 

1/8 

9 

.4932 

1.1086 

1.4795 

1.40625 

9 

10 

.5479 

1.2329 

1.6438 

1.5625 

10 

5/32 

11 

.0027 

1.3562 

1.8082 

1.71875 

11 

n 

.6575 

1.4795 

1.9726 

1.87500 

12 

3/16 

13 

.7123 

1.6027 

2.1370 

2.03125 

13 

U 

.  7071 

1.7260 

2.3014 

2.18750 

14 

15 

.8219 

1.8493 

2.4658 

2.34375 

15 

r4 

Figure  72 
328 


BANK    COST    ACCOUNTING 


329 


o 


tions  The  figures  alwve  are  based  on  the  supposition 
that  only  the  larger  items  reeeived  in  the  morning  mail 
are  cleared  the  same  day,  the  smaller  ones  being  cleared 
tl,e  following  day.  It  is,  therefore,  very  important  for 
branches  to  remember  the  necessity  of  using  the  mail 
services  intelligently  with  a  view  to  saving  interest;  m 
„tlKT  word-,  if  a  large  item  is  cashed  during  the  day.  to 
st'c  that  it  gets  out  by  the  first  mail,  even  if  a  special 
letter  is  necessary. 

Though  we  have  not  included  any  charge  for  the 
transmission  of  funds  on  tl»e  indi^  idual  i^em,  in  the  above 
examples,  this  expense  must  eventually  l)e  met  m  some 
i„nn  or  other  in  the  adjustment  of  balances  between 
branches,  either  bv  remittance  pf  legal  tender  or  bank 
notes,  etc.  Express  charges  run  from  30  cents  to  ^3  or 
M  per  one  thousand  dollars. 

The  above  facts  establish  conclusively  that  the  cashmg 
of  checks  at  par  at  the  branches  is  a  constant  source 
of  loss  to  a  bank,  and  that  outstanding  items  in  course 
of  collection  or  in  transit  form  a  more  serious  and  un- 
avoidable expense  for  which  a  bank  should  be  compen- 

230.  Cost  data.— The  loanable  value  of  the  balance 
maintained  must  be  determined  by  each  individual  bank 
for  itself  according  to  its  net  earnings.  It  can  be  ar- 
rived at  in  various  ways,  but,  roughly  speaking,  it  aver- 
ages between  4  per  cent  and  4  J  per  cent. 

Two  cents  per  check  is  considered  a  low  cost  per  item. 
F.  W.  Thomas,  of  Toledo,  an  expert  in  banking  cost 
accounting,  places  the  cost  of  an  ordinary  check  at  2. J 
cents  while  a  savings  bank  check  he  figures  costs  6i 
cents.  ISIr.  Bordwell,  of  San  Francisco,  figures  that  a 
clearing  house  check  costs  .0122  cents  and  an  out  of 
town  item  .027  cents  for  bookkeeping  only.    A  custom- 


330 


BANKINCi    PRACTICE 


1-1 


er's  check  costs  .0313  cents,  or  .0287  cents  if  the  custonter 
supplies  his  own  check  form.  A  Chicago  hank  inakes 
its  calculations  at  .01516  cents  per  check,  hut  this  figure 
does  not  include  anything  for  overhead  charges,  for  man- 
agement, clieck  blanks,  etc.  It  is  simply  for  clerical 
work,  rent,  light  and  heat.  The  other  figures  are 
over  all. 

Sir  George  H.  Murray,  one  time  Secretary  of  the 
Post  Office  in  Great  Britain,  stated  in  1902  that  it  cost 
at  least  Gd  for  every  transaction  in  the  Post  Office  Sav- 
ings Bank,  and  7d  per  transaction  in  the  Trustees  Sav- 
ings Bank. 

It  is  to  be  noted  that  the  Od  is  |)er  transaction  and 
covers  both  checks  and  deposits.  If  limited  to  checks 
would  probably  be  Is  or  more  per  entry. 

The  English  banks  not  only  charge  the  customer  for 
postage,  check  books,  and  the  like,  but  expect  a  reason- 
able balance  to  be  maintained  generally  a  minimum  of 
about  £100  in  the  city  or  £50  in  a  country  branch. 

In  arriving  at  the  actual  cost  per  item,  it  is  necessar}' 
to  include,  in  addition  to  the  cost  of  the  clerical  work,  the 
cost  of  the  supervision  of  the  manager  and  accountant, 
the  apportionment  of  the  rent,  stationery,  light,  heat,  and 
vault  and  safe  accommodation ;  also  an  apportionment  of 
head  office  expenses.  This  involves  extra  work,  but  once 
a  basis  is  established  in  an  office  for  per  item  cost,  it 
would  serve  for  the  consideration  of  all  accounts  for  the 
year.  Even  if  the  bank  considers  only  the  salaries  of  the 
men  actually  engaged  in  handling  checks  and  deposits— 
namely,  the  teller  and  ledger-keeper — the  cost  per  check, 
just  under  this  one  expense,  will  be  found  surprising. 

It  is  seldom  realized  bv  a  customer,  or  even  bv  the 
manager  himself,  that  a  check  form  on  safety  paper  costs 
$2.50  per  thousand  or  i  cent  apiece. 


HANK    COST    A((m'NTiyG  BiU 

For  the  average  braiuh  in  caskTii  Canada  a  per  itfiu 
i„sl  of  '1  cents  per  cheek  is  accurate  cnouKh  for  gen- 
tiul  purposes,  or  to  put  it  another  way.  a  steady  average 
ludunee  of  between  50  cents  to  GO  cents  per  check  issued 
slidiild  he  maintained.  An  account,  for  instance,  which 
issiHS  one  thousand  checks  per  annum  should  maintain  a 
balance  throughout  the  year  of  hetween  $.>00  a!»d  $000  to 
c.vir  the  out-of-pocket  expenses  of  the  bank  in  operat- 
ing the  account. 

•_>;n.  An  account  nnalifzcd.— In  order  to  illustrate 
some  of  the  more  elementary  features  of  cost  accounting 
the  following  brief  analysis  will  be  useful.  The  account 
shows  an  average  weekly  credit  balance  of  $7,000  for 
the  year,  average  amount  of  items  in  transit  $5,300,  aver- 
ajTf  amount  of  checks  cashed  at  par  at  other  branches 
)i$«;()0,  number  of  checks  issued  seven  thousand : 

Gross  Earnings 

Interest  on  the  average  balunfe  nt  4^%.  7'^    ^VJi 
Kxchange  received  on  items  deposited  or  collected    Jiio 

$640     $040 
Less  Value  of  Work  Done 

Interest  value  of  items  in  transit  average  $5,300 

^l  5^ .  .    •     $»«5 

Interest  on  checks  crossed  at  par  and  paid  by 

hrunches,  average  outstanding,  $600  at  5%.  30 
(  ollection  charged  paid  to  other  banks  78 

Othce  charges  on  7.000  debits  to  the  account  at 

2  ct-nts  each 2_. 

Total  cost *^^3     ^'*^^ 

which  leaves  a  net  profit  to  the  bank  of  $127. 

Even  with  the  large  balance  of  $7,000  it  will  be  noticed 
that  there  is  constantly  outstanding  $5,900,  consisting  of 
$5,300  of  items  in  transit,  and  $600  of  checks  paid  at  par 


:j:32 


BANKING    PRACTICE 


Iti 


■41 


I 


w 


h\  other  branches.  This  leaves  the  real  hahinee  prac 
tieally  $1,100  instead  of  $7,000.  It  is  well  to  remember 
that  the  bank  nuist  base  its  holdings  of  cash  reserves  on 
the  larger  or  bo«>k  balance,  which  will  reduce  the  net  bal- 
ance of  $1,100  still  lower. 

The  rate  of  interest,  4i  per  cent,  is  based  on  a  net  earn- 
ing j)ower  of  5  per  cent  less  10  per  cent  for  cash  reserve. 

The  "exchange  received"  is  self-explanatory,  hut  at- 
tention is  drawn  to  the  fact  that  the  schedule  of  exchange 
charges  is  evidently  insufficient.  In  making  the  rate,  full 
allowance  was  not  made  for  the  length  of  time  the  items 
would  be  outstanding.  The  total  cost  for  collecting  these 
items,  interest,  and  commissions,  was  $343,  or  $18  more 
than  the  exchange  collected,  and  were  it  not  for  the  free 
balance  of  $7,000  the  account  would  be  operated  at  a  seri- 
ous loss. 

The  most  satisfactory  way  of  obtaining  the  average 
amount  of  items  in  transit  is  to  m'iltii)ly  each  item  by  the 
number  of  days  it  was  outstanding,  and  divide  the  total 
amount  by  the  number  of  days  under  consideration. 
This  will  give  the  average  daily  amount  outstanding. 

In  the  accounts  of  customers  who  have  the  privilege  of 
crossing  checks  payable  at  par  at  another  branch,  par- 
ticular attention  should  be  paid  to  the  date  such  checks 
are  cashed  at  the  other  branch,  and  the  interest  during 
the  time  taken  in  transit  made  an  expense  against  the 
account,  as  shown  in  the  above  statement.  This  is  neces- 
sary, as  the  amount  of  such  checks  in  transit  not  only 
affects  the  amount  of  the  credit  balance,  but,  in  addition, 
some  customers  do  not  arrange  to  provide  funds  for  their 
checks  until  they  are  about  due  at  the  bank.  In  many 
cases  they  do  not  even  provide  the  funds  then,  until  their 
attention  is  called  to  the  matter.  Par  privileges  should 
not  be  accorded  to  accounts  of  this  nature.    They  should 


BANK    COST    ACCOUNTING 


333 


l,c  ^.laiitcd  only  to  accounts  which  keep  a  credit  balance 
con.intnsurate  with  the  work  done,  in  addition  to  having 
ample  funds  to  cover  outstanc'ing  checks. 

Although  the  account  sho^  •  profit,  it  is  not  a  normal 
„„c.  as  there  is  a  serious  wea  ss  shown  in  the  rates  of 
excliange  charged.  A  slight  ur(.p  in  the  deposit  balance 
would  turn  the  profit  into  a  loss.  An  examination  of  the 
cash  items  deposited  will  show  on  what  points  the  rate  of 
cxduuige  is  inadequate,  and  an  adjustment  should  be 
made  accordingly.  Conditions  in  a  customer's  business 
are  constantly  changing,  and  the  nature  of  the  items  de- 
posited varies  accordingly.  An  exchange  rate  that  is  sat- 
isfactory one  year  might  not  be  so  the  next. 

■_'.•{•.'.  Method  of  anal ifsis.— The  work  of  analyzing  an 
ordinary  account  is  not  very  onerous,  especially  if  sys- 
tematically followed  out,  the  course  of  the  deposit  bal- 
aiues  being  the  main  information  required.    Wholesale 
and  other  accounts  depositing  a  large  luimber  of  cash 
items  involve  more  work,  especially  if  the  data  for  the 
whole  vear  is  required.    Usually,  however,  the  transac- 
tions fi)r  a  month  are  sufficient  for  all  general  purposes. 
An  analysis  sheet  which  provides  a  space  for  all  nec- 
essary information  is  given  in  Figure  73,  and  a  brief  ref- 
erence to  some  of  the  important  headings  will  be  of  inter- 
est.   The  information  called  for  by  this  form  is  of  course 
very  much  more  full  than  it  would  be  necessary  to  con- 
sider in  analyzing  an  average  account,  but  the  form  is  in- 
tended to  be  used  for  any  account,  no  matter  how  large. 
The  amount  earned  on  an  account  dei)ends  principally 
on  the  value  of  the  credit  balances  maintained,  and  for 
puriM)ses  of  analysis  the  minimum  weekly  credit  bal- 
ance is  the  one  which  shoidd  be  considered.    Any  money 
on  deposit  less  than  a  week  has  no  loanable  value  to  a 
bank  so  far  as  an  individual  account  is  concerned.    It 


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335 


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BANKING    PRACTRE 


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11.  .  • 


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may  be  contended  that  under  the  law  of  averages,  and 
considering  the  accounts  as  a  whole,  the  average  weekly 
or  even  daily  balance  is  of  value,  but  in  an  analysis  no 
account  should  depend  for  strength  in  any  particular  on 
another  account.  For  j)urposes  of  comparison,  however, 
the  average  monthly  balance  should  be  considered  in  the 
general  sizing  up  of  the  account. 

If  the  account  shows  debit  balances  dm'ing  the  i)erio(l, 
the  exact  number  of  days  overdrawn  and  the  amount  at 
credit  should  be  shown. 

Debit  !)alances  do  not  enter  into  the  value  of  a  deposit 
account,  as  the  net  discount  or  interest  earned  thereon  is 
considered  as  part  of  the  profits  accruing  from  the  gen- 
eral loanable  funds  of  the  bank,  and  cannot,  therefore, 
be  regarded  as  a  benefit  derived  from  any  individual  ac- 
count. Furthermore,  in  the  analysis,  credit  is  accorded 
the  account  for  any  loanable  funds  supplied. 

The  average  debit  balance,  however,  is  of  value  for 
pur|)oses  of  comparison,  and  can  be  easily  ascertained  on 
the  basis  of  the  interest  debited  to  the  account  during  the 
peri(Hl. 

If  interest  is  allowed  on  the  credit  balance,  or  any  part 
of  it,  the  amount  of  interest  credited  shouhl  be  taken  into 
account  as  part  of  the  expenses.  Care  should  be  taken 
to  see  that  the  interest  credited  covers  the  whole  period 
under  analysis. 

'2lili.  rjAclianfic  received  on  items  deposited  and  col- 
lecied. — Gross  earnings  are  derived  from  the  value  of 
the  credit  balance  and  from  the  exchange  received  on 
items  deposited  and  collected.  Profits  on  special  trans- 
actions, such  as  letters  of  credit,  foreign  exchange,  circu- 
lation, etc..  should  be  shown  separately. 

In  an  ordinary  de[>osit  account  there  are  compara- 
tively few  items  deposited  drawn  on  out-of-town  points, 


BANK    COST    ACCOUNTING 


337 


and  the  rates  received  for  these  are  generally  remunera- 
tive. In  the  case  of  wholesale  merchants  and  other  dis- 
tributors, however,  who  deposit  a  large  number  of  cash 
items,  the  rate  of  exchange  charged  is  generally  low,  and 
trt(iueiitly  unremunerative,  unless  the  destination  and  in- 
terest cost  of  the  items  has  been  taken  into  consideration 
in  making  the  rate. 

The  first  data  to  examine,  therefore,  in  this  connection 
is  the  schedule  of  rates  under  which  the  account  is  op- 
erated, and  to  the  practiced  eye  the  weak  points  in  the 
arrangement,  if  any,  will  at  once  become  apparent.  A 
useful  form  for  affording  this  information  is  given  in  the 
ii|)l)cr  half  (C)  of  Figure  74,  the  analysis  of  the  actual 
items  deposited  being  made  in  the  lower  half  (D) . 

It  woidd,  of  course,  l)e  impossible  to  consider  each  item 
iiuhvidually,  and  the  best  method  is  to  divide  Canada 
into  provinces  or  sections,  as  shown  in  this  form.  The 
information  given  in  (D)  represents  the  total  of  cash 
items  (lei)osited  during  the  period  reviewed,  and  shows 
the  distribution  of  the  business  transacted,  as  well  as  the 
amount  of  exchange  collected  and  paid. 

The  totals  given  for  each  province,  etc.,  should  be  mul- 
tii)lied  by  the  average  number  of  days  items  remitted  to 
eaeh  section  are  outstanding  ( Figure  72) ,  and  the  amount 
extended  into  the  last  column.  The  total  of  this  column 
will  represent  the  amount  of  items  in  transit  outstanding 
on  the  basis  of  one  day,  and  when  divided  by  the  number 
of  days  in  the  i)eriod  will  give  the  average  amount  out- 
standing for  the  year.  It  is  a  simple  matter  for  any 
l)raiieh  to  make  a  schedule  showing  the  average  time  be- 
tween the  deposit  of  an  item  and  the  receipt  of  the  rela- 
tive clearing  returns  from  various  points  in  the  country. 

The  heading  "Local"  in  form  (D)  refers  to  checks 
(Irauri  on  banks  in  the  same  city,  the  returns  for  which 

<      Vlll-!i2 


8    C. 

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Points 

Brunfhr< 

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5 

... 

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(I'nlcs't  otherwise  instnirtcd,  lUU  wptinn  iici-d  iinly  rovpr  aii\    onr  iiicmili  prinr  lo  H,r 


£ 

5 

3 
I 

t 

« 

3 


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=  1     11RVN(H   I^OINTS 


li 


>riiritini<"  and  (iuclw' 

Ontario 

<«-nlral  Wi-.st 

I'acitir  Const 

New  York 


(   \-.ii  I  iKM  i  Cur.niTKD  WiiK.N  Dkphsitkh 


Kxrhaiif^ 
CollfHtifl      Paid 


Anionnt 
(Omit  Cent--) 


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Total.  . . 
OTHER  POINTS 

Maritime  and  Quebec 

Ontario 

Central  West 

Paeifu-  Const 

I'niled  SluteM 


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N«>Tr  III  roiinectioii  with  thi-  iil»<i\*o  itrnis  thow-  wiit  (iin-f-t  by  your  ru?*t(im^r  tn  fl» 
l"iiiit  iif  |>u.\  iiii-iit  (the  pmroifls  of  wliirh  an-  nfltTwurdrt  rrniitli-rf  t"  .voii  (nr  i-rrd't  o<  th«>^ 
cuuut;  abuuld  be  (luUnguuhed  frum  those  deponited  with  you  for  iiuiiiediate  credit. 


Figure  74 

lias 


(  OIXKCTIOXS 
^\D  CoLLATEHAUi 


Branthcs 


Other 
Points 


Drafts 
Sold 


Par  or  Other  Special  Privileges.  Etc. 


Arc  thrso  ratrs  rharoed  in  frery  insianc*? . 
In  the  work  rntailcd  above  the  average? 


.pplication  (or  credit,  prcferabb'  the  month  in  which  the  account  is  most  active.) 


Sight  Items  Chedited  When  Deposited 

Returned 

N.. 

Exchani;e 

Amount 
(Omit  CenU) 

.Vnalysis 

No. 

Amount 

Collected 

Paid 

-•-- 

■ ^ 

--- 



_^__ 

!           1 

1 

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1                  : 

1 

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SS9 


340 


BANKING    PRArriCE 


arc  not  received  until  after  clearing  the  following  day. 
An  account  could  easily  deposit  $50,000  of  local  checks 
and  have  only  $5,000  to  $10,000  balance  at  tlie  end  of 
the  day.  In  other  words,  the  bank  would  be  lending 
$45,000  overnight  without  interest.  If  this  occurs  daily 
as  it  does  to  a  great  extent,  it  is  a  serious  burden  on  the 
bank. 

Figure  75  gives  an  excellent  form  for  analyzing  the 
distribution  of  cash  items,  the  reverse  giving  columns 
for  the  local,  Quebec,  Ontario  and  maritime  provinces. 
Some  banks  prefer  to  sort  the  items  out  according  to  the 
number  of  days  they  may  be  outstanding,  in  which  case 
a  form  similar  to  Figure  76  can  be  used. 

In  allowing  for  the  time  an  item  is  outstanding  it  must 
be  borne  in  mind  that  the  loss  of  interest  does  not  cease 
until  the  actual  clearing  returns  are  in  the  hands  of  the 
bank.  Items  sent  to  correspondents,  therefore,  are  not 
finally  disposed  of  until  the  relative  settlement  chaks 
have  been  actually  cleared  at  Montreal  or  Toronto,  or 
whatever  central  point  the  draft  is  drawn  on. 

The  gross  amount  of  exchange  received,  less  the  cor- 
respondent's commission  and  interest  value  of  the  time  in 
transit,  will  show  the  net  profit  or  loss  on  exchange.  An 
account  should  also  receive  credit  for  the  net  exchange 
received  from  collections  and  discounts.  Interest  is  not 
an  expense  in  connection  with  exchange  on  collections, 
but  in  arriving  at  the  net  exchange  on  discounts  the  time 
occupied  in  the  remitting  or  returning  the  items  should 
be  taken  into  account. 

The  basis  of  rebate,  if  any,  in  connection  with  cash 
items  or  discounts  should  be  looked  into  carefully,  as 
this  is  a  fruitful  source  of  loss. 

234.  Checks  paid  at  par  at  other  branches. — Refer- 
ence has  already  been  made  to  the  loss  sometimes  entailed 


z  £. 


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,„  jrrantin^  this  privilege.  In  the  case  of  checks  cashed 
at  par  hv  another  hranch  a  mcnioraiulum  should  he  iiuide 
l,v  tlif  it'ilKer-keeper  in  the  ledger  o|)|M)sitt  the  clieck, 
>|i()«inK  the  date  of  encashment.  The  check  lieconies  a 
(liariff  against  the  acc«)nnt  directly  it  is  pai<l  hy  the  other 
l.iaiicii.  The  analysis  of  some  accounts  in  regard  to 
itnus  ill  transit  and  checks  paid  at  par  will  frequently 
jitfnni  surprising  results  in  the  dissolving  of  apparently 
sultstaiitial  halances. 

•J.T).  Gvmrnl  rcm(irkH.—T\w  (juestion  of  cost  account- 
in^r  |„r  hanks  offers  a  large  Held  ftir  stu<ly  and  investiga- 
tion, and  it  is  impossihle  in  a  volume  of  this  nature  to 
.kill  exhaustively  with  the  suhject.  The  outlines  al()ne 
liave  been  touched  ui)on,  in  the  hojie  that  the  information 
and  suggestions  given  wouhl  he  sufficient  to  arouse  the 
iiitiiTst  of  the  reader,  and  induce  him  to  make  a  further 
study  of  what  is  an  intensely  interesting  suhject.  Every 
inaniiger  should  make  himself  thoroughly  acquainted 
witli  the  c«)sts  and  expenses  at  his  own  hranch  and  with 
the  operation  of  every  account,  in  order  that  he  may  find 
(lilt  whether  the  time  si>ent  hy  himself  and  the  staff  in 
(.|)eiating each  account  is  compensated  for  by  the  balance 
at  credit,  or  other  collateral  advantages. 

Tile  analysis  itself  is  purely  mechanical,  and  the  real 
test  is  to  decide  whether  an  adjustment  of  the  rates 
should  he  discussed  with  the  customer,  or  whether  the 
(olhiteral  advantages  of  the  account  outweigh  any  unsat- 
isfactory feature  discl«)sed  by  the  analysis.  Business 
iiitii,  as  a  rule,  are  not  um-easonable  when  an  issue  is  put 
s(|narely  l)ef.)re  them.  Few  would  refuse  to  make  some 
adjustment  of  an  account,  if  they  were  shown  that  it 
was  working  a  palpable  injustice  to  the  hank.  The  tact- 
ful manager  could  take  advantage  of  a  favorable  oppor- 
tunity to  suggest  to  a  customer  slight  changes,  which 


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344 


BANKING   PRACTICE 


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m 


would  plaee  the  account  on  a  more  satisfactory  basis 
Various  methods  are  available;  the  balance  might  be  in^ 
creased,  the  exchange  rate  adjusted  or,  in  the  case  of  a 
small  checking  account,  a  flat  rate  of  50  cents  or  $1  per 
month  could  be  made. 

It  is  preferable  to  submit  the  account  to  a  rigid  analy 
sis  and  thus  allow  leeway  for  the  consideration  of  col- 
lateral  benefits,  rather  than  to  make  a  less  exhaustive 
analysis  and  run  the  risk  of  overlooking  some  unfavor- 
able  feature.  After  an  analysis  is  completed,  consider 
carefully  all  the  advantages  of  the  connection.  The  cus- 
tomer's side  of  the  question  should  also  be  impartially 
considered;  he  may  have  cause  for  complaint  and  anal- 
ysis  is  invaluable  in  either  case.  Where  an  analysis  is 
unsatisfactory  it  is  generally  advisable,  unless  the'unfa- 
vorable  feature  is  very  outstanding,  to  defer  any  action 
until  the  fact  has  been  confirmed  by  the  next  analysis. 


CHAPTER   X 


INTERNAL   INSPFXTION 


236.  Branch  inspection. — At  irregular  intervals  and 
at  least  once  a  year  every  branch  is  visited  by  an  inspector 
and  his  assistant  from  head  office,  and  a  thorough  audit 
of  the  books  and  assets  of  the  office  made. 

An  inspection  consists  of  two  kinds  of  examinations, 
naniclv,  verification  and  valuation.  The  first  is  called 
the  audit  or  routine  inspection,  and  consists  of  an  audit 
of  all  the  books,  and  a  verification  of  the  physical  exist- 
ence of  the  assets  of  the  branch,  as  well  as  the  correctness 
of  tlie  liabilities.  All  routine  matters  are  carefully 
checked  to  see  if  head  office  instructions  are  being  con- 
furnied  with. 

Tlie  first  part  of  the  inspection  is  made  by  a  routine 
inspector,  or,  as  he  is  sometimes  called,  audit  officer,  who 
either  accompanies  or  precedes  the  senior  inspector,  with 
one  or  more  assistants,  according  to  the  size  of  the 
hranch. 

The  second  phase  or  inspection  proper  is  made  by  a 
senior  inspector,  and  consists  of  a  thorough  analysis  and 
valuation  of  the  loans  and  other  assets  of  the  branch. 
The  senior  inspector's  particular  duty  is  to  discuss  with 
the  manager  the  inspection  liability  return  with  a  view 
to  obtaining  a  valuation,  as  correct  as  possible,  of  the 
loans  and  securities  held  by  the  branch. 

To  be  a  good  inspector  requires  special  training  and 

345 


346 


BANKING    PRACTICE 


qualifications.  In  the  first  place,  a  thorough  knowledge 
of  all  conditions  of  branch  work  is  essential,  and  this 
training  can  be  acquired  only  through  actual  experience 
in  branch  positions,  from  that  of  manager  downward. 

The  inspector  follows  the  audit  officer  as  soon  as  the 
inspection  report  on  liabilities  is  completed,  though  in  the 
case  of  small  branches,  which  have  but  few  large  loans, 
the  liabilities  can  be  discussed  by  the  routine  inspector  or 
by  correspondence,  and  a  visit  from  an  inspector  is  there- 
fore not  necessary. 

237.  The  audit. — Although  the  work  involved  by  an 
audit  is  too  specific  to  be  dealt  with  fully  .n  this  chap- 
ter a  brief  consideration  of  its  methods  and  require- 
ments will  he  of  value  in  emphasizing  some  of  the  essen- 
tial features  of  Canadian  practice.  Practically  all  banks 
are  similar  in  their  method  of  auditing,  though  with  some 
the  examination  may  be  more  exhaustive  and  searching. 
The  following  procedure  may  be  considered  as  fulfilling 
the  requirements  of  an  average  audit: 

The  audit  ofl^icer  and  his  staff  of  assistants  time  their 
arrival  in  a  town  so  as  to  reach  the  office  at  the  close  of 
the  day's  business,  and  thus  interfere  as  httle  as  possible 
with  the  service  to  the  public.  Their  arrival,  of  course, 
is  unheralded.  Immediately  on  entering  the  office  con- 
trol of  the  safe  is  obtained  and  the  following  taken  into 
custod  v : 


Treasury  and  teller's  cash,  etc. 

Bill  cases  containing  discounts,  collateral  notes,  col- 
lections, etc. 

Cash  books,  vouchers  for  the  day,  including  letters 
received. 

Current  account,  general  and  saving  ledgers. 

Collection  register. 


INTERNAL    INSPECTION 


347 


2.18.  Caah  and  securities. — The  auditor  then  proceeds 
to: 

Count  in  detail  the  teller's  cash  and  the  treasury 
cash. 

Take  charge  of  deposits  made  up  for  the  clearing 
house  and  see  that  they  are  credited  by  other 
hanks  the  following  day  without  deductions,  or  if 
deductions  are  made,  ascertain  their  nature. 

Obtain  verifications  of  balances  due  to  or  by  other 
banks. 

Ascertain  from  the  teller's  cash  statement  book 
whether  the  cash  has  been  examined  in  detail  at 
irregular  intervals  at  least  twice  a  month. 

See  that  a  satisfactory  explanation  is  entered  in  the 
teller's  cash  statement  book  opposite  each  impor- 
tant cash  over  and  cash  short  item. 

Check  list  of  collateral  securities  with  the  securities 
themselves  and  with  the  register. 

Examine  all  life  and  fire  insurance  policies  and  see 
that  they  are  properly  assigned  to  the  bank  and 
otherwise  in  form. 

See  that  all  securities  are  properly  hypothecated 
and  otherwise  in  order. 

Check  list  of  securities  held  for  safe-keeping  with 
the  documents  or  packages  themselves. 

Send  hsts  of  all  negotiable  securities  held  as  col- 
lateral or  for  safe-keeping  for  verification  by 
owners. 

A'erify  existence  of  loans,  trade  bills,  and  past  due 
hills,  initialing  for  each  item  in  the  diary  or  past 
due  bills  register. 

Make  a  summation  of  the  totals  in  the  bill  diarV 
and  compare  with  balances  in  the  general  ledger. 


348 


BANKIXC;    PHACTlCi: 


ii  i.:^.lti 


Ihe  bill  diary  should  be  kept  in  the  custody  of 
the  inspec  ting  officers  from  the  time  they  begin 
to  check  the  bills  until  the  totals  have  been  veri- 
fied. 

Examine  bills.  Take  a  memorandum  of  all  items 
not  correctly  drawn  in  every  respect,  and  Imnd 
them  to  the  manager  or  accountant  to  be  put  in 
order  as  soon  as  possible. 

Verify  the  existence  of  local  collections  and  col- 
lateral  bills  held,  checking  off  each  item  with  its 
relative  entry  in  the  collection  diary. 

See  that  all  collections  outstanding  in  the  collection 

register  are  properly  accounted  for. 
Examine  collections  and  collateral  bills,  ascertain- 
mg  regularity  of  acceptance  and  correctness  of 
due  dates. 

Mail  to  branches  and  correspondents  for  verifica- 
tion, lists  of  trade  bills  remitted,  collateral  bills 
i-enn'tted  and  items  outstanding  in  cash  item  ac- 
count. 

239.  The  ledgers,  etc.— 

Call  off  the  day's  checks  and  deposits  and  othe- 
vouchers  with  cash  book,  and  compare  cash  book 
entries  with  current  account  and  savings  ledgers. 

Take  a  rough  list  of  current  account  balances  and 
outstanding  checks,  and  afterward  instruct 
ledger-keei)er  to  balance  ledger  in  the  usual  way 
in  his  balance  book. 

Take  off  balance  from  savings  ledgers,  listing  bal- 
ances on  inspection  return. 

When  the  current  account  ledger  has  been  bal- 
anced, call  off  balances,  initialing  the  balances  in 
the  ledger  and  comparing  them  with  list  previ- 
ously prepared. 


INTERNAL    INSPECTION 


349 


theck  general  ledger  balance  sheet,  initialing  bal- 
ances in  the  general  ledger. 
Kxamine  each  ledger  heading  in  the  current  ac- 
count uiul  savings  ledgers  and  see  if  all  particu- 
lars reciuired  have  been  entered,  also  if  rules  re- 
garding loose-leaf  sheets  have  been  observed. 
Check  all  entries  for  authorities,  powers  of  attor- 
ney, etc.,  with  list  of  authorities  held. 
Sec  that  proper  entries  have  been  made  in  deposit 
receipt  account  in  the  general  ledger  for  all  re- 
ceipts issued  and  paid  since  last  insi>ection. 
Examine  endorsements  on  receipts  paid  since  last 
inspection,  and  see  that  they  are  tied  up  and 
sealed  with  the  inspector's  private  seal. 
Kxamine    powers    of    attorney,    resolutions    and 

documents  respecting  signing  officers. 
Check  date  of  last  certification  of  each  ledger  bal- 
ance. 
See  that   certificates   are   properly  tilled   in   and 

signed. 

240.  Sundries. — 

Compare  inspection  liability  sheets  prepared  by  the 
staff  with  liability  ledger. 

Examine  entries  in  cash  item  register  since  date  of 
last  inspection,  noting  any  items  outstanding  an 
undue  length  of  time. 

Ascertain  if  any  items  have  been  put  through  as 
cash  items  which  should  have  been  shown  on  dis- 
count return  as  trade  bills  remitted. 

See  that  the  following  books  and  records,  etc.,  are 
properly  kept: 
Manager's  diary. 
Discrepancy  book. 


^50  HANKINCi    PKACTKi: 

Record  of  lost  drafts,  stopped  checks,  etc. 

Overdrafts  register. 

Circular  book. 

Overdue  debt  register. 

Postage  account. 

Record  of  examination  of  bank  premises. 

Character  card  file. 

Receipt  for  duplicate  keys,  etc. 

Rates  book. 

Record  of  mercantile  agency  reports  received. 

The  following  lists  and  statements  are  prepared  bv 
the  staff  and  handed  to  the  manager  or  accountant, 
and  when  checked  and  completed  by  them  given  to 
the  inspector: 

Adjustments. 

Assignments  of  goods. 

Balance  sheet,  general  ledger. 

Bank  premises,  safes  and  vaults. 

By-laws,  minutes,  etc.,  list  of. 

Comparative  statement  of  condition  of  branch. 

Current  account  balances. 

Deposit  receipts  outstanding. 

Drafts  issued  accounts. 

Insurance  policies  held — fire. 

Insurance  policies  held— life. 

Letters  of  credit  outstanding. 

Letters  of  guarantee. 

Liabilities  of  customers. 

Partnership  agreement. 

Past  due  bills,  list  of. 

Powers  of  attorney,  list  of. 

Reports  on  officers. 

Securities,  collateral. 


INTKRNAL    INSPECTION 


351 


Securities,  safe-keeping. 

Sterling  exchange  purchased  and  current. 

Trade  bills  remitted,  summary  of. 

Verifications,  current  accoiuits. 

Verifications,  letters  of  credit. 

A'erifications,  trade  and  collateral  bills  remitted. 

Warehouse  receipts,  loans  on. 

Waivers. 

•Jll.  Inspection  liabilitif  return. — This  return  shows 
every  liability  in  detail  whether  overdue  or  not.  The 
iiaiiits  of  all  obligants  should  he  in  strict  alphabetical 
order,  and  the  totals  of  the  loans  and  trade  bills  in  each 
account  should  be  shown  in  the  proper  column  opposite 
the  names  of  the  customers.  All  securities  should  be 
shown  in  detail  with  the  manager's  estimate  of  values. 
The  following  information  should  appear  in  the  report 
on  each  important  account : 

Names  and  ages  of  individuals  or  partners. 

Head  office  authorization  and  expiry  date  of 
credit. 

Total  fire  insurance  carried  both  on  liquid  and  fixed 
assets,  and  the  amount,  if  any,  assigned  to  the 
bank. 

Discussion  of  customers'  position  and  balance  sheet 
giving  copy  of  the  latest  statement  of  affairs  and 
notes  as  to  the  changes  of  importance  therein,  in- 
dicating progress  or  the  reverse. 

Remarks  regarding  customers'  wills  or  deeds  of 
partnership,  having  reference  to  the  way  in  which 
the  bank  would  be  affected  by  the  death  of  the 
customer. 

Ill  reporting  on  farmers'  and  other  casual  loans,  the 
original  date  of  the  transaction  must  l)e  given. 


35:2  BANKING    PIIACTICE 

if  any  portion  of  the  advance  has  l)een  running 
for  more  than  twelve  months.  The  ol)ject  of  the 
loan,  time  of  repaynient,  and  source  from  which 
tlie  money  is  to  come,  should  also  l)e  stated. 
The  purpose  for  which  a  loan  has  been  granted  and 
the  source  of  repayment  should  be  stated— also 
the  prol)able  course  of  the  advance,  unless  pay- 
ment is  assured  at  maturity. 

In  connection  with  all  important  accounts  the  fol- 
lowing points  should  be  fully  discussed  with  the  man- 
ager by  the  inspector,  and  the  significant  features  made 
the  subject  of  correspondence: 

Personal : 

floral  character,  habits,  and  business  ability. 

Past  record. 

State  of  health. 

liife  insurance  carried. 

General : 

Is  financial  progress  satisfactory? 

Fluctuations  in  liability  and  reason  for  anv  sub- 
stantial  increase — highest  and  lowest  points  of 
advance  monthly  for  past  year. 

Promptness  in  meeting  obligations. 

Obligations  in  connection  with  interests  outside  the 
business,  if  anv. 

Titles  to,  and  liens  or  mortgages  on  property,  in- 
formation, researches,  etc. 

Value  of  collateral  held. 

Value  of  the  account  or  the  connection. 

Any  special  features  or  influences  which  are  likely 
to  benefit  or  be  detrimental  to  the  customer  or  the 
business. 


INTEUNAL    INSPECTION 


353 


If  a  wholesale  house: 
Distrihution  and  classification  of  risks  in  credits 

to   customers,    also   any    recent   or    anticipated 

josses. 
Financial  responsihility  of  largest  customers. 
I'l'icentuge  of  hills  returned  unaccepted  or  unpaid. 

Alttr  fully  discussing  with  the  manager  all  the  out- 
staiidiiiK  features  in  the  different  accounts  the  in- 
spirtor  is  in  a  position  to  offer  a  reasonahly  close  valu- 
ation i)f  all  the  accounts,  which  he  does  according  to  the 
following  ratings: 

1.  First-class  business. 

2.  Accoiuits  regarded  as  desirable,  but  which  do 
not  liquidate  satisfactorily. 

3.  liusiness  desirable  because  of  the  connection  or 
local  conditions,  but  not  on  its  merits  otherwise. 

4.  I'lidesirable  but  probably  collectible. 
.).  Locked  up  but  eventually  collectible. 
<».  Marginal  loss  probable. 

7.  Bad. 

( A  )    Secured  by  mortgage,  etc. 

(B)  Interest  l)eing  set  aside  as  a  contingent  fund. 

(C)  Not  producing  interest. 

On  his  return  to  the  head  office,  the  inspector  takes  ux^ 
witli  tile  branch  and  records  by  correspondence  any  ob- 
jectionable features  in  the  accounts,  which  he  thinks  re- 
quires adjustment  or  comment. 

242.  Rules  and  regulations. — Every  Canadian  bank 
lias  its  own  book  of  rules  and  instructions,  supplemented 
from  time  to  time  by  means  of  circulars.  Every  offi- 
cer is  expected  to  make  himself  thoroughly  familiar 
with  these  rules,  and  no  one  is  excused  from  neglect  of 

C— VI 11—33 


iloi 


n.\NKiN(;  iMiAcncK 


duty  oil  the  pica  of  i^^iiorancc  or  misapprehension.  Tlie 
instructions  arc  intended  to  effect  uniformity  of  prac 
tice  in  the  branches,  and  to  assist  the  staff  in  the  efficient 
discharge  of  their  (hities.  A  l)lind  eomphance  with  the 
rules  under  all  circumstances  is  not  expected  or  advisa- 
hlc,  and  though  they  should  be  closely  followed,  discre- 
tion is  ix-'miissible  under  certain  conditions.  All  rules, 
hoNvever,  covering  the  custody  of  the  cash  and  securities. 
and  the  checking  and  other  internal  routine,  should 
under  no  circumstances  be  modified  or  departed  from 
without  express  permission.  If  a  rule  be  found  imprac- 
ticable, owing  to  local  or  other  conditions,  the  facts 
shotdd  be  placed  l)efore  the  general  manager  who  will 
authorize  such  modification  as  may  be  necessary  for  a 
specified  time  only,  at  the  expiration  of  which  the  ap- 
plication must  again  be  renewed  if  the  conditions  r^ 
main  unchanged. 

At  each  inspection  a  list  of  printed  questions  based 
on  the  rules  and  regulations  is  filled  in  by  the  auditor. 
The  questions  are  so  framed  that  they  can  nearly  all  be 
answered  by  a  negative  or  affirmative.  A  list  of  these 
questions  w  ith  the  approved  answers  is  given  in  the  ap- 
pendix. A  perusal  will  not  only  give  the  reader  an  idea 
of  the  comprehensive  nature  of  these  books,  but  also 
afford  a  useful  insight  into  routine  matters. 

In  addition  to  rules  dealing  with  routine  matters, 
these  books  generally  contain  a  great  deal  of  useful  and 
necessary  information  on  legal  and  other  points,  and 
when  studied  in  conjunction  ^^  ith  the  Bank  Act  and  Bills 
of  Exchange  Act  give  a  most  serviceable  knowledge  of 
banking  law  and  requirements. 

243.  Staff  reports.—  At  least  once  a  year  the  man- 
agers are  called  upon  to  make  a  full  report  on  each  indi- 
vidual member  of  their  staff,  and  this  is  supplemented 


INTKUNAI,    INSPHCTION 


353 


!)V  a  s|)ccial  report  made  by  the  inspector.  Practically 
similar  forms  are  used  in  both  instances.  Figure  77 
is  c-iiinprchensive.     The  rating  used  is  as  follows: 

Al  Highest  rating. 
1   First-class. 
•J  Above  average. 
a  Average. 
4  Helow  average. 
3  Low.     Unsatisfactory. 


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357 


CHAPTER   XI 


LABOR-SAVING    METHODS 


244.  Efficiency  methods.— The  first  object  of  an  ac- 
countant  in  taking  charge  of  an  office  should  be  to  see 
that  the  work  of  tlie  staff  is  so  arranged  that  loss  of  time 
and  motion  is  reduced  to  a  minimum.  No  matter  how 
excellent  the  staff"  may  be,  they  are  severely  handicapped 
in  results  unless  the  work  of  an  office  is  well  system- 
atized. Some  accountants  have  a  genius  for  organiza- 
tion, others  can  only  acquire  the  knowledge  by  experi- 
ence and  careful  study. 

The  steady  increase  in  the  volume  of  entries  passing 
through  a  city  office  has  necessitated  the  study  by  banks 
of  scientific  office  organization,  and  the  adoption  of  a 
number  of  labor-saving  machines. 

The  staff  should  be  encouraged  to  work  together  as 
a  unit.  There  is  just  as  much  room  for  good  "team 
work"  in  an  office  as  there  is  in  a  football  field.  The 
good  work  accomplished  by  such  men  as  Taylor,  Em- 
erson, and  others  in  teaching  the  principles  of  "efficient 
and  scientific  management,"  though  directed  particu- 
larly to  shop  management,  is  applicable  to  any  class 
of  business,  including  banking.*  These  men  are  able 
to  go  into  a  factory,  watch  the  operatives  at  work,  make 
a  study  of  their  motions  and  methods,  and  from  this  ob- 

'  An  ahlo  treatise  showing  liow  lluvse  principles  may  be  applied  in  the  offit-e 
will  be  found  in  "The  American  Office— Its  Organization,  Management  ani 
Records."  by  J.  William  Schulze. 

358 


LABOR  SAMN(i    METHODS 


359 


sci\ati()ii  show  where  waste  movement  and  loss  of  time 

otriirs. 

Out'  of  the  most  elementary  examples  of  the  work  ac- 
i.,iii!|)lisliL(l  by  efficiency  experts  is  in  the  manner  in 
\vlii(li  the  method  of  bricklaying  was  improved.  The 
ordinary  ])roce(hire  in  bricklaying  is  for  the  workman 
to  stiKij),  take  a  brick  from  a  mixed  pile  at  his  feet,  and 
cm  y  it  to  the  wall.  If  the  workman  weighs  two  hundred 
|)(Miii(ls.  and  can  lay,  say,  one  thousand  bricks  a  day,  he 
would  he  lifting  his  own  weight  about  four  feet  each  time 
hv  took  up  a  brick.  An  efficiency  expert,  after  watching 
;.  hiickhiyer  at  work,  devised  a  little  table  or  platform, 
a(ljiistiil)ie  to  any  height,  which  holds  the  bricks  proper 
silk-  II |)  in  a  neat  pile  at  the  workman's  side.  Lost  mo- 
tion and  waste  of  energy  is  almost  eliminated  by  this  sim- 
l)k'  (k'\  ice,  as  stooping  and  sorting  are  unnecessary.  The 
man  is  able  to  lav  three  times  as  many  bricks  as  under  the 
old  method,  and  would  noAv  use  five  motions  where  for- 
ii.oily  eighteen  were  necessary. 

The  connection  between  banking  and  bricklaying 
may  not  be  apparent  at  first,  but  the  lesson  should  be. 
Kvcry  class  of  work  in  an  office- is  susceptible  of  im- 
l)i()venient  by  the  elimination  of  waste  movements  and 
(lii|)licate  liandling.  It  is  a  simple  lesson  of  what  can 
l)e  accomplished  by  a  little  thought,  and  should  be  con- 
stantly home  in  mind  in  offije  organization. 

Many  important  efficiency  methods  used  by  banks 
may  he  mentioned,  the  batch  system  of  handling  clear- 
ings, etc.,  the  machine  statement  in  place  of  the  pass- 
liook,  t!ie  use  of  perforated  deposit  slips,  and  the  numer- 
ical system  for  branches  and  customers. 

l)iiI)lication  of  entries  should  be  avoided  as  much  as 
possihle.  and  where  possible,  carbon  copies  should  he 
made.    Customers  who  deposit  long  lists  of  collections 


-x^  A 


360 


BANKING    PRACTICE 


iffl^l 

II 

1 

it          '  k 

should  be  asked  to  use  a  special  form  in  listing  them,  a 
co])y  of  which  could  be  filed  by  the  bank  as  a  record,  the 
bank  adopting  the  customer's  immber  as  its  own.  Ad- 
vice of  payment  or  intjuiries  can  thus  be  made  by  num- 
ber instead  of  by  name,  and  this  is  a  great  convenience 
in  practice.  The  number  on  the  item  is  so  placed  that 
the  bank  collection  stamp  can  be  used  over  it.  Long 
lists  of  collaterals,  trade  i)aper,  etc.,  can  be  handled  ad- 
vantageously in  this  manner,  though  in  the  latter  the 
number  would  necessarily  l)e  different.  Only  the  totals 
from  the  lists  would  be  entered  in  the  bill  register.  Fig- 
ure  78  shows  a  form  which  can  be  adapted  to  any 
of  the  above  purposes.  The  addition  of  columns  for 
banking  towns,  etc.,  dispenses  with  the  necessity  of 
a  diary.  One  entry,  therefore,  by  the  customer  pro- 
vides him  with  a  record,  and  the  bank  with  a  register 
and  diary. 

245.  Departments  in  a  /^flw/v-.~Although  the  wickets 
of  even  the  small  branches  bear  the  legends  "Discount 
Department,"  "Savings  Bank  Department,"  etc.,  the 
designations  exist  simply  as  a  convenient  name  rather 
than  as  a  condition.  Even  in  large  city  offices  the  plan 
of  dividing  the  work  of  the  office  into  departments  with 
responsible  heads  is  not  followed  out  to  any  great  extent. 
This  is,  no  doubt,  due  to  the  centralization  of  control  and 
responsibility  in  the  manager  and  accountant  and  the 
final  review  and  control  by  head  office.  A  departmental 
system  developed  as  fully  as  it  is  in  the  United  States 
would  add  to  the  expense,  without  relieving  the  manager 
of  ultimate  responsibility.  In  the  United  States  the 
large  city  banks  divide  the  Avork  of  the  office  into  dif- 
ferent executive  departments  each  in  charge  of  a  vice- 
president,  assistant  cashier  or  other  senior  officer.  These 
men  as  a  rule  are  specialists,  highly  trained  in  the  par- 


•ia 


=  =-.2 


:^i  a 


-  «£5 


-  — ^  >i 
::  =  w  d 

^%% 

•*  i  i  fci 


t,  *  d  y 


^  =  a  0 

=  111 
c  =•»  S 

■  —  *  22  ♦* 


I 


361 


3G2 


BANKING    PRACTICE 


ticiilar  work  of  their  departments.  Under  branch  organ- 
ization, specialization  in  any  line  of  banking,  except 
foreign  exchange,  is  best  administered  from  head  office. 
from  whence  the  expert  knowledge  would  be  available 
for  the  whole  system. 

In  the  routine  or  internal  administration  of  an  office, 
however,  the  division  of  the  work  for  balancing  and  other 
purposes  can  be  worked  out  to  advantage  irrespective  of 
the  size  of  the  office,  and  the  teller's  entries  should  be  so 
arranged  that  the  different  divisions  or  "departments" 
can  balance  independently  of  each  other.  The  following 
main  divisions  are  the  ones  generally  adopted : 

1.  Deposits. 

2.  Discounts. 

3.  Checks  and  cash  items. 

4.  Collections. 

5.  Branch  clearings. 

Debit  and  credit  columns  are  provided  in  the  teller's 
blotter  for  these  headings  with  an  additional  column  for 
sundries.  Each  department  can  thus  prove  its  work  at 
the  end  of  the  day,  or  at  any  time  during  the  day  for  that 
matter,  and  the  cash  book  clerk  in  balancing,  would 
have  to  check  only  the  teller's  totals  and  the  details  of 
the  sundry  column,  in  a  search  for  a  difference.  A  bright 
junior  would  be  quite  capable  of  taking  charge  of  any 
one  of  these  bookkeeping  divisions.  This  idea  is,  of 
course,  <"isceptible  of  extension  to  suit  the  particular 
needs  of  any  office  no  matter  how  large,  the  underlying 
principle  being  to  segregate  the  work  into  classes  suf- 
ficiently distinct  from  each  other  and  thus  eliminate  any 
chance  of  confusion  of  items. 

The  adoption  of  the  system  outlined  above  does  not 
necessarily  mean  that  each  member  of  the  staff  should 
confine  his  attention  and  work  entirely  to  one  depart- 


LAnOR-SAVING    METHODS 


363 


,„eiit:  on  the  contrary,  he  should  employ  his  slack  time 
(liiiino-  the  day  in  assisting  with  the  work  in  other  de- 
nartiiietits.  Local  conditions,  such  as  the  arrival  of  the 
mails,  will  govern  the  accountant  in  the  adjustment  of 
the  work  of  the  office  in  this  connection.  In  large  city 
(iHicts  it  will  sometimes  be  found  an  advantage  to  give 
(inc  man  the  ])osition  of  say,  chief  clerk,  whose  particular 
duty  would  be  to  organize  and  dovetail  the  work  of  the 
otlice  in  such  a  way  that  it  is  evenly  distributed. 

•2W.  Hatch  method. — The  batch  or  block  method  is 
the  I)t'st  system  of  avoiding  loss  of  time  in  an  office,  and 
pioiiiptly  locating  differences.  It  can  be  easily  adai)ted 
to  till-  woik  of  any  office  though  its  use  is  most  evident 
ill  the  larger  offices.  The  daily  work  of  the  average 
liraiicli  can  be  roughly  divided  into  three  or  four  divi- 
sions or  blocks  of  entries.  The  first  is  received  in  the 
iiioming  mail,  the  second  through  the  morning  clearing, 
and  tilt'  other  two  through  the  morning  and  afternoon 
eotiiiter  work  and  sundry  mail  matters.  The  idea  is  to 
handle  these  batches  separately  so  that  they  may  be  bal- 
anced separately,  the  totals  only  being  passed  through 
the  teller's  book.  If  the  office  is  large  this  work  should 
lie  ])laced  in  charge  of  a  mail  or  check  teller  and  the  en- 
tries i)assed  through  his  blotter.  It  is  necessary  that 
the  cohinm  headings  in  all  the  tellers'  books  should  be 
uiiit'orni,  and  the  entries  so  arranged  that  any  depart- 
ment of  the  bank  can  balance  its  day's  work  by  com- 
parison with  the  totals  for  that  department  obtained 
from  the  various  tellers. 

As  soon  as  the  morning  mail  has  been  entered  in  the 
letteis  received  register,  the  check  lists  from  the 
liraiK'hes  and  correspondents  are  called  off  and  the  items 
scrutinized.  They  are  then  sorted  out  into  different 
classes  and  listed  by  an  adding  machine  on  specially 


304 


BANKIN(;    ritACTKK 


I 

It 


ruled  forms  or  butch  sheets,  with  a  column  for  each 
class.  The  combined  totals  of  these  cohimns  slioultl 
agree  with  the  total  amount  shown  by  the  letters  re- 
ceived register  and  the  batch  is  thus  balanced.  If  not. 
the  error  can  be  easily  located.  The  totals  are  then 
passed  through  the  teller's  b{K)k,  and  the  items  are  dis- 
tributed to  the  various  departments  and  follow  their 
usual  course. 

The  entries  generally  consist  of  the  following: 


Cr. 
Brunch  ("U'arinps 
Correspondents 


Dr. 
Ordinary  Checks 
Savuigs  (Checks 

('hecks  on  branches  (rec'd  from  corre- 
spondents) 
('hecks  on  city  banks  (for  clearing) 
Sundries 

If  the  ledger  is  a  divide^  one,  a  column  should  be 
given  to  each  division  in  the  batch  sheet,  and  the  checks 
sorted  accordingly,  A-K,  etc. 

If  any  of  the  items  have  to  be  returned,  for  any  rea- 
son, these  totals  are  not  affected,  as  the  item  is  dehitetl 
back  through  the  usual  channels. 

The  morning  clearing  from  local  banks  which  is  gen- 
erally received  about  10.30  a.m.  is  dealt  with  in  tlie 
same  way,  except  that  the  cash  delivery  from  the  clear- 
ing is  first  initialed  for  and  taken  over  by  one  of  tiie 
tellers.  I^arge  lists  are  generally  balanced  separately, 
but  the  lists  from  the  smaller  banks  can  be  dealt  with 
in  batches  of  three  or  four,  the  total  finally  agreeing 
with  the  total  amount  of  the  clearing.  The  entries 
would  consist  of  the  following: 


Cr. 
Clearings  Received 
Exchange  on  Branch  Checks 


Dr. 

Ordinary  Checks 
Checks  on  Branches 
Savings  Checks 
Drafts  and  Sundries 


LAUOlt  SAVING    MKTIIODS 


365 


Hiaiicli  checks,  with  exchange  dethictions,  are  thrown 
,„it  jiikI  entered  at  the  foot  of  the  proper  column  at  face 
valiif.  \vith  the  amount  of  exchange  shown  at  the  side 
„!'  cadi  entry,  the  total  of  the  latter  heing  credited  to 
ixcliaii^e.  As  rapidly  as  each  batch  is  balanced  the 
items  arc  passed  over  to  their  resi)ective  departments 
and  t iittrcd  up  in  the  usual  way,  and  on  completion  the 
Mil)|)liintntary  cash  book,  outward  check  lists,  etc.,  can 
|)c  exactly  balanced.  This  procedure  can  be  followed  in 
tlic  same  way  with  all  other  entries. 

With  the  exception  of  a  few  items  received  by  mail 
diiiii.^'  the  day,  the  remainder  of  the  day's  entries  con- 
sists almost  entirely  of  items  received  by  tlie  teller  over 
till'  counter  and  passed  through  his  books  in  the  usual 
way.  No  further  batch  balancing  is  necessary  except 
for  some  unusual  inflow  of  work  which  calls  for  special 
Imiidliiig.  As  all  entries  intended  for  the  cash  book  are 
])asscd  through  the  tellers'  blotters,  the  total  of  any  class 
of  entries  can  be  checked  up  as  often  as  necessary  dur- 
iim  the  (lav.  For  instance,  the  totals  of  the  supple- 
mtntary  cash  book  can  be  compared  several  times  dur- 
iii<i'  the  afternoon  with  the  totals  from  the  tellers'  books. 

The  system  is  outlined  above  in  the  simplest  form.  It 
can.  however,  be  contracted  or  expanded  to  suit  the  re- 
(liiircments  of  any  office  large  or  small.  The  advan- 
tages of  the  method  are  apparent.  There  is  little  or  no 
delay  in  distributing  the  items  to  the  various  depart- 
ments. Every  batch  is  self-contained,  balanced,  and 
finally  disi)osed  of  as  far  as  the  day's  work  is  concerned. 
With  a  definite  balance  to  check  his  work  every  man  has 
an  added  incentive  to  accuracy,  and  the  whole  staff  is 
sj)e(<!e(l  up  to  efficiency  and  promptness.  After  the 
method  is  once  in  operation  it  requires  little  supervi- 
sion.   Even  the  greenest  junior  can  be  safely  left  to 


r 


i 


366 


IIANKI\(i    IM{A(  TKi; 


work  out  his  own  balance  witliout  unduly  retarding  the 
rest  of  the  office. 

•247.  Special  dc posit  «/i>».— Another  time  saver  in  an 
t)ffice,  where  there  are  customers  depositing  a  large  num. 
her  of  checks  and  other  cash  items  during  the  day,  is  the 
u' .?  of  a  perforated  deposit  slip  as  in  Figure  79.    AH 
checks  are  listed  on  the  left-hand  side  of  the  perfora- 
tion; the  total  only  is  extended  on  the  right-hand  side 
and  included  with  the  cash  to  make  the  total  deposit. 
The  teller  receiving  a  deposit  on  this  form  will  count  the 
number  of  items  and  check  off  the  amount  on  tlie  main 
deposit  sli]),  tear  off  the  check  slip  and  pass  it  over  with 
the  items  to  an  assistant  or  check  teller  outside  the  box, 
who  will  check  the  addition  arid  make  the  necessan' 
scrutiny  of  the  endorsements.     The  assistaht  will  then 
distribute  the  items  to  the  various  departments  after 
making  the  necessary  entries  in  his  blotter.     The  re- 
ceiving teller  will  enter  the  total  of  the  main  deposit 
slip  (cash  and  check)  on  the  credit  side  of  his  blotter 
and  debit  the  check  teller  with  the  amount  of  the  checks 
handed  him. 

Where  the  customers  deposit  a  large  number  of  cash 
items  it  is  advisable  to  have  them  deposited  entirely  sep- 
arate from  the  cash,  and  with  a  separate  list  for  local 
and  out-of-town  items. 

Under  the  ordinary  method  fully  50  per  cent  of 
the  teller's  time  is  taken  up  in  ticking  off  and  checking 
cash  items  deposited,  the  cash  handled  being  a  compara- 
tively small  i)ercentage  of  the  total  deposits.  As  a  mat- 
ter of  fact  an  actual  test  made  showed  that  over  9i  per 
cent  of  the  deposits  consists  of  checks  and  other  cash 
items,  while  the  remaining  6  per  cent  is  composed  of 
bank  notes  and  silver.  Counter  space  is  valuable,  and 
the  increased  efficiency  of  a  teller  in  handling  customers 


n.itr 


S\MK  or  I)i,p<miT«m 

(  herkx 


rtwitKP 


I      ! 


TIIR    BANK 

TciRONTo  Bhanc'R 

181 

CREDIT 


X 

I^ 

X 

«  = 

X 

4- 

X 

5- 

X 

10- 

X 

«0- 

X 

W  = 

X 

50  = 

X 

100  = 

$ 

Gold.. 

Silver. . 

Coppers 

Checks. 

do 

Less  Exchange 

Total.. 

$ 

FiocRE  79 
367 


368 


BANKIN(i    I'UACTKK 


under  this  system  is  most  evident.    Tlie  method  should 
be  adopted  wherever  possible. 

248.  Numerical  trannit  #//«/<•///.— The  numerical 
transit  system  in  the  United  States  was  evolved  by  « 
special  committee  appointed  by  the  American  Hankers 
Association,  and  though  in  operation  only  a  few  vears 
has  fully  justified  its  adoption.  Checks,  endorsemetit 
stamps,  etc.,  of  over  50  per  cent  of  the  banks  in  the 
Tnitcd  States  arc  now  nunikTcd  under  this  system,  and 
other  banks  are  falling  into  line  as  quickly  as  the  old 
forms  of  stationery  arc  exhausted.  The  system  has  also 
been  ado[)te<i  an<l  put  into  use  at  the  treasury  depart- 
ment at  Washington. 

This  system  provides  every  one  of  the  28,000  old 
banks  and  trust  companies  in  the  United  States  with  a 
definite  lumiber  of  its  own;  the  number  l)eing  published 
in  a  directory  and  appearing  on  all  checks,  endorsement 
stamps,  and  the  like. 

The  system  may  l)e  descril)ed  briefly  as  follows: 
The  reserve  cities  are  each  designated  by  a  prefix 
number,  and  are  numbered  from  one  to  forty-nine  in- 
clusive, in  the  order  of  their  population.  The  clearing 
house  banks  in  these  cities  are  numbered  with  their  clear- 
ing house  numbers,  and  additional  numbers  are  sup- 
plied non-clearing  banks  which  are  numbered  accord- 
ing to  seniority,  the  individual  numbers  of  the  banks 
following  the  prefix  numbers  of  the  cities.  Numbers 
from  fifty  to  ninety-nine  are  used  as  prefix  numbers 
to  designate  the  states  in  numbering  banks  outside  of 
the  reserve  cities,  the  individual  numbers  of  the  banks 
following  the  prefix  number  of  their  respective  states. 
The  numbers  thus  assigned  are  to  be  printed  on  the 
face  of  the  checks,  and  will  also  appear  on  the  endorse- 
ment stamps. 


LAIMJK-SAVING    METHODS 


360 


III  the  circular  issued  by  tlie  American  Hankers  As- 
smiatioii  explaining  the  system,  the  co-operation  of  oil 
hniiks  and  trust  companies  throughout  the  Cnited 
Statts  is  recpiested  to  a  strict  observai  ce  of  the  follow- 
in  j(  rules: 

First;  To  he^in  nt  once  to  cndorHC  all  items  with  an  cnclofHC- 
iiHiif  stamp  iMiiriii^  llio  niunhrr  H^Ni^iicd  t«i  your  bimk.  Num- 
bers shdiilil  be  plticed  on  the  htiinipN  us  Kliown  in  tiic  following 
>[Hciiiiin : 

PAY  TO  THE  ORDER  OI 

Any  Bank,  Banker  or  Trust  Co. 

All  Prior  Endorsement!  Guaranteed 

JULY  1.  1911 

NATIONAL   CITY   BANK 

1  -8  New  York,  N.  Y.  1  -8 

A.  *%     ^'ANAGH,  Cashier 

Second:  Tiy  printing  the  number  assigned  to  your  bank  on 
III!  checks  drawn  on  your  bank  and  on  certificates  of  deposit 
and  cashiers'  checks.  The  number  to  be  printed  immediately 
following  the  name  of  the  bank  as  shown  in  the  following  speci- 

iiif  n : 


OHiOAeO,  ILL 1B1. 


e>l|r  9\tBt  •National  Sank  of  Cl^iraQO     2-1 


ntr  TO  THE  ORDER  OF 


OOLLARR 


(_VIII_24 


370 


BANKING    PRACTICE 


Third:  By  printing  tlic  number  assignrd  your  bank  and 
also  the  number  assigned  your  correspondents  on  allyour  drafts 
drawn  on  your  correspondents,  and  also  on  drafts  drawn  "pay- 
able if  desired"  on  your  correspondents.  The  numbers  to  be 
printed  immediately  following  the  name  of  the  bank,  as  shown 
in  the  following  specimen  : 


The  First  National  Ba:nk    18-3 

KA^SSAS  CITY,  MO.,                                No. 
Pay  to  the  obder  of      ft 


DOLLABS 


TO 

CONTINENTAL  ft  COMMERCIAL 
NATIONAL  BANK   2-3 

CHICAGOJ 


CAtmi 


Fourth:  By  drawing  drafts  in  payment  for  remittance  to  the 
order  of  banks  and  not  to  the  order  of  bank  officers. 

The  process  of  gjetting  all  banks  and  trust  companies 
to  number  their  checks  and  other  documents  is  neces- 
sarily slow,  as  the  supply  oi  ordinary  stationery  must 
first  be  exhausted.  The  extent,  however,  to  which  the 
banks  have  adopted  the  system  may  be  realized  by  ex- 
amining any  list  of  American  checks. 

The  introduction  of  transit  numbers  has  revolution- 
ized the  work  of  the  American  banks,  as  practically  ail 
their  remittance  lists  are  now  made  out  on  the  addiiii? 
machine,  numbers  alone  being  used  in  recording  the 
particulars,  with  a  saving  of  from  .50  to  75  per  cent 
over  the  old  method.  The  Burroughs  Adding  Ma- 
chine Company  make  a  special  machine  with  a  split 
keyboard    for   this    purpose,   which    records    endorser, 


LABOR-SAVING    METHODS 


371 


l)avcc,  amount,  and  instructions  with  one  insertion  of 
tiif  letter  or  list.  A  few  special  keys  are  provided  which 
print  the  initial  letters  of  such  instructions  as  "no  pro- 
test."' "bills  of  lading  attached,"  "telegraph  non-pay- 
iiitiit."  etc.    An  examjile  may  be  seen  from  the  follow- 


"utf  endorsement: 


Drawn  on 


K  11(11  )rsod  by: 

Amount:     $1,670.50    Xo  protest 

recorded  numerically  thus : 

'■i-'^  1-8  $1,679.50 


Transit 
No. 
ConliiR-nlal  &  Conmcrcial  National 

Bank,  Chicago 2-3 

National  City  Bank  of  New  York . .     1-8 


N.P. 


As  a  further  adaptation  of  the  numerical  principle 
many  l)aiiks  liave  already  adopted  the  plan  of  number- 
ing all  customers,  more  especially  those  who  deposit 
many  f)ut-of-town  items,  the  number  appearing  on  the 
I'lulorscnient  stamp  of  the  customer  and  noted  in  re- 
cording the  item.  In  case  of  checks  paid  by  the  paying 
tdlcr  to  customers,  and  others  whose  transactions  are 
tiu)  inf're(iut'nt  to  warrant  the  use  of  a  stamp,  it  would, 
of  course,  be  impracticable  to  give  them  numbers.  It  is 
customary  to  handle  such  transactions  by  having  the 
teller  register  the  name  of  the  endorser  on  his  blotter. 
The  teller's  number  is  then  stamped  on  the  check  to 
indieate  the  teller  who  has  received  the  item.  By  this 
means  it  can  be  easily  traced.  Numbers  given  by  a  bank 
to  its  local  customers  in  no  way  conflict  with  the  other 
niiinl)ers.  as  they  have  no  prefix. 

In  order  to  avoid  confusion,  the  first  ten  numbers  can 
I'c  (le'.oted  to  the  use  of  the  tellers  and  other  depart- 
ments of  the  office,  and  the  customers  numbered  from 
eleven  on.  The  method  of  numbering  customers  opens 
'ip  a  large  field  in  the  sorting  and  recording  of  office 


372 


BANKING    PRACTICE 


i 


work,  in  addition  to  its  usefulness  in  the  transit  depart- 
ment. 

249.  Transit  numbers  in  Canada. — At  the  Annual 
Meeting  of  the  Canadian  Bankers'  Association  in  1898 
the  writer  advocated  the  adoption  of  a  uniform  numer- 
ical system  for  branches,  but  no  steps  were  taken  to  put 
this  into  force.  The  success  of  the  system  in  the  United 
States,  however,  has  demonstrated  conclusively  the  ad- 
vantages of  using  numbers.  The  following  method  has 
been  suggested  for  Canada ;  it  has  already  been  adopted 
by  several  banks  and  it  is  hoped  that  it  will  eventually 
become  general: 

First:  A  prefix  number  for  each  bank,  taken  from 
the  governmen'  r.tatement,  where  the  banks  are  ar- 
ranged by  seniority  of  charter.  This  order  would 
therefore  remain  unchanged  during  a  bank's  exist- 
ence, which  cannot  be  claimed  for  any  other  basis  of 
arrangement — alphabetical,  size  of  capital,  etc. 

Second:  An  affix  number  for  each  bi:-nch,  the  ar- 
rangement of  which  is  a  matter  for  the  individual 
banks  to  decide.  It  is  recommended,  however,  that 
a  common  number  be  used  by  all  the  banks  to  repre- 
sent the  larger  clearing  centers. 

These  larger  cities  may  be  numbered  from  1-50  ac- 
cording to  their  population — thus,  INIontreal  1,  Toronto 
2,  Winnipeg  3,  etc.  By  this  method  every  bank  in  these 
cities  would  have  a  uniform  number;  the  bank  of  Mon- 
treal in  INIontreal,  Toronto  and  Winnipeg  would  be  des- 
ignated by  1-1,  1-2,  1-3;  The  Canadian  Bank  of  Com- 
merce in  the  same  cities  by  12-1,  12-2,  12-3  and  so  on 
If  a  bank  did  not  have  a  branch  in  one  of  these  cities 
the  rmmber  would  be  a  blank  as  far  as  it  was  concerned, 
until  such  time  as  a  branch  was  opened.    Outside  the 


LABOR-SAVING    ^lETHODS 


S73 


advajitages  of  uniformity  this  plan  apportions  the 
sinaller  numbers  to  the  branches  on  which  the  most 
items  are  drawn. 


PREFIX    N'UMBERS    OF    BANKS 


')  Bank  of  British  North  America 
15  Hank  of  Hamilton 

1  IJaiik  of  Montreal 

4  Bank  of  Nova  Scotia 
18  Bank  of  Ottawa 

6  Bank  of  Toronto 
'26  Bank  of  Vancouver 
17  Banque  de  Hochelaga 

8  Banque  Natiouale  (La) 
10  Bruque  Provinciale  du  Canada 

(La) 
1-2  Ca  adian  Bank  of  Commerce 

(The) 
14  Dominion  Bi.nk  (The) 


23  Home  Bank  of  Canada 

(The) 
19  Imperial  Bank  of  Canada 

9  MerchantsBankofCanada 
22  Metropolitan  Bank  (The) 

7  Molsons  Bank  (The) 

24  Northern  Crown  Bank 
3  Quebec  Bank  (The) 

13  Royal  Bank  of  Canada 
16  Standard  Bank  of  Canada 

25  Sterling  Bank  of  Canada 
11  Union  Bank  of  Canada 
27  Weyburn  Security  Bank 


N;)TK —These  prefix  numbers  were  taken  from  the  Government  Bank  State- 
ment of  May,  I91i. 


AFFIX    XUMBERS    OF    BRAXCHES 

Clearing  Cities,  Etc.,  Population  of  10,000  and  Over 


1  Montreal 

21  Glace  Bay 

2  Toronto 

22  Fort  William 

;>  Winnipeg 

23  Sherbrooke 

4  N'aiicouver 

24  Berlin 

a  Ottawa 

25  Guelph 

(>  Hamilton 

26  Three  Rivers 

7  Quebec 

27  St.  Thomas 

8  liOndon 

28  Brandon 

9  Halifax 

29  Moose  Jaw 

10  ('algary 

30  New  Westminster 

11  St.  John,  N.  B. 

31  Stratford 

l'-2  Victoria 

32  Owen  Sound 

l;5  Reg'uia 

33  St.  Catharines 

14  Edmonton 

34  Saskatoon 

15  Brantford 

35  Moncton 

1()  Kingston 

36  Port  Arthur 

17  Peterboro 

37  Charlottetown 

18  Windsor,  Ont. 

38  Lachine 

1}>  Sydney 

39  Chatham 

^20  Hull 

374 


BANKING   PRACTICE 


40  Gait 

41  Sault  Ste.  Marie 

42  Saniiu 

43  Belleville 

44  St.  Hyacinthe 


45  Valleyfield 

46  Broekville 

47  \V(K)d.stock 

48  Niagara  Falls 

49  Sorel 


N..TE-It  .s  .nt..„d.',J  that  the  smaller  numbers.  1-4!).  will  be  crnimon  toaH 
banks,  as  m  tins  way  no  large  city  will  use  more  than  two  figures.     The  n-muinder 

of  the  branches  can  be  arranged  according  to  the  in.lividual  requiremeuU  of  ih 
banks  adoptmg  this  system. 

The  remaining  branches  of  each  bank  can  be  num- 
bered according  to  convenience.  The  banks  which  have 
already  adopted  the  sys.em  use  a  geographical  divi- 
sion of  the  country,  corresponding  to  the  districts  of 
their  various  superintendents,  thus: 

East    100—299  Maritime  provinces  and  Quebec 
300—399  Ontario. 
400—499  Spare  numbers. 

West  500-699  CenlralWest  (Manitoba,  Alberta  and 
Saskatchewan ) . 
700 — 899  Spare  numbers. 
900—999  British  Columbia. 

In  apportioning  the  branches  to  these  different  dis- 
tricts the  alphabetical  arrangement  is  retained,  and 
numbers  left  blank  for  the  addition  of  new  branches  in 
alphabetical  order.  It  will  be  noted  that  numerical  sort- 
ing arranges  items  automaticallv  into  East  and  West, 
and  into  the  various  districts  in  alphabetical  order  The 
usefulness  of  the  numerical  system  to  a  Canadian  bank 
IS  much  greater  than  it  is  to  an  American  bank. 

Ihe  constantly  increasing  numl)er  of  branches  in 
many  of  the  banks  has  made  the  old  method  of  abbre- 
viation for  branches  dangerous  as  far  as  accurate 
designation  is  concerned.  A  systematic  and  generally 
recognized  method  of  numbering  should  be  welcome,  es- 


LABOR-SAVING    METHODS 


375 


ptcially  in  view  of  the  fact  that  the  numbers  will  appear 
oil  all  cliec'ks,  drafts,  letterheads,  rubber  stamps,  etc.— in 
fact,  every  place  where  the  name  of  a  branch  is  printed. 
Oil  branch  clearing  and  other  statements,  in  the  mailing 
(Itpaitiiient,  in  filing,  and  for  many  other  purposes,  such 
:i  system  is  economical,  labor-saving,  and  efficient. 

The  arrangement  of  branches  into  districts  is  found 
most  useful  in  ticking  off  the  branch  clearings  state- 
ment, as  the  majority  of  the  entries  for  a  branch  is  with 
hraneiies  in  the  same  district,  and  when  arranged  nu- 
'iKiiealiy  they  all  come  together.  Under  the  straight 
al|)lial)etieal  arrangement  the  responding  entries  are 
scattered  throughout  the  sheet  instead  of  being  together. 

'.'.)().  Machine  statements. — Nearly  all  the  large  city 
branches  of  Canadian  banks  have  adopted  the  practice 
of  rendering  machine  statements  of  the  customers'  ac- 
counts in  ])reference  to  using  pass-books  for  the  pur- 
pose. The  statement  system  eliminates  the  dreaded 
■pass-book  night"  at  the  end  of  the  month,  relieve^  the 
conj^estion  of  the  ledger  wicket,  enables  the  accountant 
or  statement  clerk  to  maintain  a  constant  check  on  the 
accuracy  of  the  ledger  balances,  and,  above  all,  lessens 
the  chance  of  fraud  and  error  by  insuring  the  receipt  by 
each  customer  of  a  statement  of  his  account  at  regular 
intervals,  monthly  or  weekly  as  desired.  With  the  pass- 
l)0()l<  system  a  mistake  might  run  for  several  weeks  or 
months  through  the  failure  of  the  depositor  to  bring  in 
bis  pass-book  to  be  balanced.  Where  a  regular  state- 
ment is  sent  an  error  is  sure  to  be  detected  on  receipt. 

The  adoption  of  the  statement  system  involves  no 
cxtia  expense  in  the  long  rini,  as  the  improved  service  to 
tlie  (iistomers  soon  justifies  the  initial  expense  of  the 
statement  machine,  and  the  salary  of  a  statement  clerk. 

The  machine  usually  used  is  the  Burroughs  Adding 


376 


BANKING    PRACTICE 


if 


Subtracting  Statement  machine  which  compiles  the  fol 
lowing  in  one  operation: 

(a)  Lists  the  checks  on  the  sheet  and  carries  then 
into  the  subtracting  mechanism. 

(b)  Lists  deposits  made  and  carries  them  into  th( 
adding  mechanism. 

(c)  Lists  balance  of  previous  day  and  carries  i| 
into  adding  mechanism. 

(d)  Strikes    the   difference   between   credits  and 
debits. 

(e)  If  balance  is  an  overdraft  strikes  letters  "OD" 
alongside  the  balance  paid. 

The  operations  may  be  made  in  any  order  desired  bv 
a  particular  bank. 

The  carriage  is  automatic  and  controls  not  only  its 
own  movement  across  the  sheet,  but  also  the  adding 
and  subtracting  mechanism.  Overdrafts  are  automat- 
ically deducted,  and  cannot  be  printed  without  being 
marked  "OD." 

The  method  of  operation  is  very  simple.  After  the 
checks  and  deposits  passing  through  the  current  ledger 
have  been  checked  to  the  supplementary  cash  book  the 
first  thing  in  the  morning,  they  are  cancelled  and  handed 
to  the  statement  clerk,  who  lists  them  on  the  various 
statements.  Figure  80  with  the  perforated  balance  slip 
to  the  left  is  the  form  in  general  use.  The  operacor 
first  records  on  the  machine  the  last  balance  shown  on 
the  statement  and,  after  making  all  the  previous  day's 
entries,  debits,  and  credits,  extends  the  balance  to  date. 
As  It  is  necessary  to  have  slips  for  each  entry  the  ledger- 
keeper  furnishes  the  statemem  clerk  with  a  memoran- 
dum for  each  accepted  check  or-tstanding,  which  is  re- 
placed by  the  check  itself  as  soon  as  it  comes  in.    The 


Pleaw  r.iuii.iiie  at  uDce  and  Hepurt  soy  Diflerance  in  the  SUUment 
Direct  to  the  Accountant 


.Vni'CHEBS  Retubnco 


_is  Account  with. 


THE  BANK 

WiNsiPEO,  Canada.        Month  of 


Kiiiill>  N"ti(>   Your  I.eUger  Keeper  of  Change  of  Address. 


Cbick^'      ■     Checks 


Forward    li    Forward 


Checks 


Total 


Date 


Total 
Balance 
Forward 
From 


Total 
Debits 


Deposits 


Outstanding 
Checks 


Balance 
Dr.-Cr. 

As  At... 


Date 


1 
2 
3 

4 
5 
U 
7 
8 
9 
10 

n 

12 
13 
14 
15 
16 
17 
18 
19 
20 
21 
22 
23 
24 
25 
26 
27 
28 
29 
30 
31 


Balance 


FiocrRE  80 

377 


378 


BANKING    PRACTICE 


statements  are  filed  in  ingenious  trays  so  divided  that 
the  balance  slii>s  of  the  day's  operative  accounts  projett 
from  the  general  file  of  statements.  Thus  the  active  and 
inactive  accounts  for  the  day  are  separated  without  dis- 
turhing  the  alphabetical  or  numerical  arrangement.  It 
is  therefore  a  simple  matter  to  make  a  comparison  of 
the  statement  files  with  the  relative  ledger  balance  if 
desired.  AVhere  the  employment  of  a  special  statement 
clerk  is  not  warranted,  statements  can  be  made  up  at 
regular  intervals  instead  of  daily,  but  the  work  should 
be  so  arranged  that  the  entries  for  oidy  one  day  should 
be  necessary  at  the  end  of  the  month. 

The  pass-book  is  still  used  in  connection  with  state- 
ment accounts,  but  simply  as  a  receipt  for  deposits  to 
the  customer.  A  special  form  is  generally  used  with 
provision  for  deposit  entries  only.  In  view  of  the  regu- 
larity of  the  statements  and  the  constant  lessening 
chances  of  errors,  some  banks  have  ventured  to  depart 
from  the  universal  rule  of  not  permitting  the  teller  to 
enter  or  initial  deposits  in  a  pass-book,  and  allow  him  to 
do  so  in  the  case  of  customers  who  receive  machine  state- 
ments. The  time  gainejl  for  both  the  customer  and  the 
bank  more  than  offsets  the  slight  risk  of  fraud  by  the 
teller  in  this  connection.  The  customer  can  make  liis 
deposit  and  have  it  entered  in  his  pass-book  without  the 
necessity  for  wasting  his  time  at  the  ledger-keeper's 
wicket.  The  ledger-keeper  also  benefits  and  has  more 
time  to  attend  to  acceptances  and  other  duties.  If  nec- 
essary, the  customer  can  present  his  book  for  compar- 
ison with  the  ledger  at  irregular  intervals  during  the 
month. 

Pass-books  will,  of  course,  continue  to  be  used  for 
certain  accounts,  but  the  envelope  system  can  be  used 
to  advantage  for  small  accounts.    Aii  envelope  specially 


LABOR-SAVING    METHODS 


379 


ruled  with  a  progressive  balance  is  kept  entered  up  from 
tin  ItdMtr  or  vouchers,  the  checks  being  enclosed  as  en- 
ttiid.  With  the  exception  of  j)erhaps  a  few  entries,  the 
I  stiittrmnt  is  always  ready  to  be  handed  to  the  customer 
I  !is  opportunity  offers.  This  method,  combined  with  the 
stattmcnt  system,  is  of  great  assistance  in  relieving  the 
vaults  of  an  accumulation  of  checks  and  vouchers.^ 

'  For  furlluT  details  the  reader  is  referred  to  Mr.  H.  M.  Jefferson's  excellent 
s|«ri.il  nport  cm  "Depositors'  Monthly  Statement  System,"  and  the  special 
tulKilH  (111  this  suhjett  published  by  i'le  Burroughs  Adding  Machine  Company. 


CHAPTER   XII 


fi 


111 

n 

I 

1 


i\ 


MISCELLAXEOCS 

Too  much  attention  cannot  be  given  to  the  work  i 
connection  with  the  collection  department;  beyond  th 
responsibility  entailed,  the  exactness  and  promptness  o 
the  service  governs,  in  great  measure,  the  opinion  o 
corresi)on(lents  and  other  banks. 

251.  Collcctions.~ln  the  case  of  a  draft  with  bill  o 
ladnig  attached,  where  delay  is  anticipated,  the  sendinj 
bank  should  be  communicated  with  immediately  for  per 
mission  to  hold  for  arrival  of  goods,  etc.,  and  a  copy  o 
the  letter  kept  (Figure  81),  unless  written  instniction 
to  that  effect  are  contained  in  the  letter  enclosing  th. 
draft;  even  then  advice  should  be  sent  if  acceptance  ii 
delayed  more  than  three  days. 

Prompt  remittance  should  be  made  for  all  items  am 
special  care  taken  to  follow  all  instructions  carefully 
Unless  otherwise  instructed,  all  items  requiring  accep 
tance,  if  refused,  should  be  returned  not  later  than  tlu 
tlnrd  day  after  they  are  received  unless  subject  to  pro 
test,  when  they  must  be  returned  as  soon  as  the  notarv 
can  make  the  protest  (the  same  day  if  possible).  Foi 
mstance,  such  items  are  generally  received  in  the  morn- 
uig  mail  and  should  be  immediately  entered  in  the  col- 
lection register  and  presented  that  day  to  the  drawees, 
if  they  reside  in  the  town.  If  the  drawees  are  not  pre- 
pared to  accept  immediately,  a  draft  can  be  held  for  two 
days  longer;  but.  if  not  then  accepted  (on  the  third  day) 

380 


THE  BANK 

101 

TlIK   M-VNACiKR 

I)k\h  Sm: 

I'lcasc  nolo  that  acceptance  of 

I  has  Im'cii  rrfused  by  the  drawees  for  one  of  the  following  reasons 
We  >hall  lioUl  drafts  unless  otherwise  instructed  by  you 

ft-iY"  Reasons  for  holding  crossed  X 

I'art y  writing  GwkIs  not  as  ordered 

N(i  iiiv<)i<i'  re<'cived  Will  pay  less  discount 

*(liM>(|.s  not  arriwd  Out  of  town  until 

('■(Hitls  nut  checked  Claims  credit  for  goods  returned 

i 

i  or    


*A>  we  arc  not  in  a  position  to  inform  ourselves  as  to  arrival  or  non-arrival 
of  ^'iioils,  and  have  to  dc|M<nd  upon  statement  of  Drawees,  we  cannot  take  any 
ropunsibiiity  in  the  matter. 

Yours  truly. 


Manager 


FlGTTRE  81 

381 


l\Hi 


HANKlNCi    r»A(  TKi: 


it 


it  rmist  ho  ('(Hisidcml  dislionoml  and  icturnt'd.  or.  if  pr, 
testable,  handed  to  the  notary,  who  will  make  the  ('iJa., 
on  that  date.  Where  the  drawees  reside  at  outside  |K)i„i 
the  item  nmst  not  he  held  lon^r^r  than  five  days  inclnsiv, 
The  ahovc  represent  the  maximum  jieriocis  for  whii. 
dralts  may  he  hehl,  and  eustomers  should  k-  ur^ed  t 
aeeept  pn.mptly.  A  little  attention  and  explanation o 
the  manager's  part  toward  this  end  should  greatly  fadli 
late  aeeeptances. 

2.VJ.  I{iport,s  on  cnalonicrs.—'So  transaetion  of  an' 
eonse(|uenee  should  he  made  entirely  deper.dent  upontii 
aeem-aey  of  mercantile  ageney  reports.  Their  unrelia 
hility  is  emi)hasized  anew  from  time  to  time  by  th, 
failure  of  concerns  having-  the  highest  ratings,  wliosi 
collapse  proves  them  to  have  lieen  the  veriest  shells.  In 
formation  should  also  he  obtained  from  other  branclie 
or  corresi)on(lents,  who  have  facilities  for  knowing  tl« 
financial  position  of  traders  in  their  locality,  which  tlu 
mercantile  agencies,  whose  representatives  visit  a  dislricl 
once  or  twice  a  year,  have  not.  All  such  reports  should 
be  placed  on  file  in  readily  accessible  form  for  future 
reference. 

The  ratings  of  the  mercantile  hooks  are  not  to  be  fully 
trusted.  Any  reductions  in  such  ratings,  however, 
should  never  be  overlooked— there  is  generally  good  rea- 
son  for  it.  The  ratings  of  all  parties  in  whom  the  bank 
IS  mtcrested  should  be  personally  compared  with  pre- 
vious ratings  in  each  new  issue  of  the  mercantile  book. 
for  the  express  purpose  of  discovering  any  reductions 
that  have  been  made. 

There  is  a  constant  necessity  for  revision  of  opinion 
of  the  standing  of  customers  and  the  parties  with  whom 
they  deal.  The  financial  position  of  no  one  should  be 
taken  for  granted  kcause  he  professes  to  be  worth  a 


MISCKIJ.ANKOUS 


383 


.riven  Slim,  or  has  a  repiitutioi)  for  wealth  in  the  com- 
iiuiiiitN .  .Iiidpntiit  shoiihl  not  he  influenced  hy  i>opular 
, million,  nor  should  u  hank  continue  to  accord  the  same 
cndit  t(i  a  |R'rs(»n  wlio  years  hefore  may  have  heen  wor- 
thy of  it,  hut  is  so  no  longer  (although  prohahly  hvin^ 
ill  tin-  sitmi'  style  and  havinj?  the  same  reputation  for 
wtiiltli).  Ohservanee  of  actual  transactions  and  appre- 
'  lion  III'  their  significance  arc  safe  guides;  popular 
(i|)iiiinn  is  not. 

H(  ports  are  frcijuently  requested  hy  correspondents, 
and  the  utmost  care  should  l)e  exercised  in  giving  out 
iiildiinatioii  regarding  the  standing  of  customers  and 
ntliiis.  An  unduly  favorahle  expression  of  helief  might 
iiMilt  in  the  hank  l)eing  mulcted  for  damages,  and  an  ad- 
Mi'sc  It  port  might  hring  suit  from  the  person  concerned 
(III  till'  plea  that  his  credit  had  heen  injured.  Rej)orts 
frivcn  out  on  the  standing  of  parties  should  invariahly  he 
iKiidid  "Confidential  and  without  prejudice  to  this  bank 
or  to  the  writer." 

Xo  statement  or  document  of  anv  kind,  other  than 
pass-books,  where  the  initials  only  will  he  used,  should  l)e 
issiifd  to  the  public  without  being  signed  by  the  man- 
ajrvror  other  officer  who  is  jiutlvMT/ed  U>  act  in  his  stead. 

'ly.i.  Expense  account. — A  dollar  saved  in  an  econ- 
omy is  of  far  more  value  than  a  dollar  made  on  a  trans- 
action: the  former  is  in  perpetuity,  while  the  latter  op- 
porlnnity  may  not  occrr  again. 

Salaries,  rent  and  other  major  items  of  ex[)ense  are 
autliorizfd  by  the  head  office,  and  it  is  in  the  minor  ex- 
penses, such  as  stationery,  etc.,  that  economy  can  be  ef- 
feekd.  The  handling  of  the  stationery  affords  oppor- 
tunity for  the  exercise  of  good  judgment  in  controlling 
Maste.  Important  economies  in  the  expenses  under  this 
head,  in  the  aggregate  amounting  to  a  large  sum,  ma^ 


384 


BANKING    PRACTICE 


i 
1 


i 


if 

ti 


;.! 


u 


often  be  effected.  Efforts  in  this  direction  should  be 
unremitting,  but  should  not,  of  course,  be  stretched  to 
tlie  point  of  penuriousness. 

JNIuch  waste  is  caused  by  carelessness  in  filling  out 
forms  both  by  the  customers  and  by  the  staff.    A 
check  or  draft  form  costs  j  cent,  and  yet  how  main- 
are    wasted.      Some    of    the    special    forms    supplied 
by  a  bank  cost  still  more.    Blotting  paper,  ink,  pencils 
and  the  like  are  all  subject  to  unintentional  waste.   To 
avoid  waste  of  stationery,  it  is  important  that  the  supply 
should  be  under  the  direct  clij.-ge  of  the  accountant  anil 
should  be  systematically  arranged  and  kept  under  a  look 
and  key,  in  a  cabinet  reserved  exclusively  for  the  pur- 
pose.   He  or  his  assistant  should  personally  hand  out 
only  such  quantities  as  are  actually  required.    The  in- 
discriminate issue  of  checks  and  other  forms  to  customers 
of  the  bank  entail  a  serious  loss  upon  the  bank.    Due 
regard  to  economy  should  be  observed  in  dealing  with 
applications  for  stationery  made  by  any  customer.    A 
source  of  much  waste  is  to  allow  an  unnecessary  accumu- 
lation of  stationery  in  the  drawers  of  the  various  desks. 

Telegrams,  lawyers'  fees,  traveling  expenses  and  simi- 
lar expenses  iocurred  in  connection  with  the  bank's  cus- 
tomers should  be  charged  to  them,  and  such  recoveries 
should  always  be  received  at  the  moment;  later  they 
might  be  called  in  question  and  lead  to  annoyance. 

Long-distance  telephone  tolls  should  be  carefully 
scrutinized  to  see  that  all  possible  refunds  have  l)een 
made,  and  that  no  charge  is  incurred  on  the  part  of  the 
bank  where  a  letter  will  answer  the  purpose  equally  as 
well. 

254.  Fire  insurance.— Bven  though  a  bank  is  not  im- 
mediately concerned  with  the  question,  it  is  customary  to 
impress  upon  all  customers  the  wisdom  of  keeping  their 


ill 


^iw« 


MISCELLANEOUS 


385 


,„.oj)crty  well  insured.  It  is  a  common  practi(  3  to  assign 
fiie  jiisiiranee  to  a  bank  to  cover  direct  advances,  and  it 
is  vtiv  necessary  that  a  manager  or  accountant  should 
he  al)ie  to  judge  whetiicr  the  policy  afl'ords  the  security 
of  its  face  value  or  not. 

Tiic  two  most  important  points  to  he  considered  are: 
tlie  riiiancial  standing  of  t!ie  company  itself  and  its  legal 
position  in  the  province.  Is  it  licensed  to  do  business^ 
If  not,  the  policy  si,  )uld  he  refused,  for  in  case  of  loss 
there  would  he  ditHc  lly  in  eollci  ting  a  claim.  Even  if 
licensed,  the  strengti:  of  the  company  should  he  fully 
considered.  If  these  two  points  are  satisfactorily  an- 
swered, the  policy  itself  should  be  examined  and  the  fol- 
lowing points  kept  in  view: 

The  property  insured  should  be  correctly  described, 
a.ul  in  the  case  of  merchandise  antl  other  movable  prop- 
erty, the  place  or  placts  where  it  is  stored  correctly  stated. 

The  interest  of  the  policyholder  in  the  property — as 
owner,  trustee,  bailee,  etc. — should  be  expressed.  If  this 
interest  is  subject  to  a  mortgage  or  other  lien  the  fact 
should  he  stated. 

If  i)roperty  is  insured  in  more  than  one  company  the 
consent  of  each  to  the  concurrent  insurance  in  the  other 
c()nii)any  or  companies  should  appear  on  the  policy,  un- 
less this  requirement  is  expressly  waived  therein,  by  the 
following  clause:  "Further  concurrent  insurance,  if  re- 
quired, permitted  icithout  notice." 

The  effect  of  an  existing  co-insurance  clause  should  be 
carefully  considered. 

The  distribution  of  insurance  in  policies  covering  more 
than  one  item — for  example,  buildings,  machinery  and 
stock-  should  be  carefully  scrutinized.  An  excess  on 
one  item  and  a  deficiency  on  another  might  lead  to  a 
heavy  loss  in  case  of  fire. 

(■-VIlI_.>o 


;j«G 


iJA\Ki\(;  ruACTici: 


li 

it 


If 


if 


AVatch  for  "red  ink"  clauses  and  .s})ecial  condition 
which  nii^ht  weaken  the  vahie  of  the  j)olicy.    The  polici 

shouhl  invariably  read ;  "Loss,  if  any,  i)ayahle  to ' 

and  never  "Loss,  if  any,  i)ayal)le  to as  its  iiiteres 

may  a|)|)ear." 

A  contract  of  insurance,  that  is,  the  policy  itself,  wouk 
he  invalidated  by  its  assignment  without  the  consent  o 
the  company,  or  by  its  assignment  with  or  without  tli 
consent  of  the  company  to  a  party  not  having  an  "in 
surable  interest"  in  the  property  insured.  A  mortgag 
or  lien  on  the  i)roperty  constitutes  an  insurable  interesl 
The  assignment  of  the  possible  loss,  however,  is  not  ai 
assignment  of  the  insurance  contract,  and  does  not  affec 
the  policy;  but  the  consent  of  the  company  should  b 
obtained  in  every  case. 

Any  irregularity  in  respect  to  the  above-mentione 
jjoints  might  vitiate  the  insurance. 

Should  a  bank  hold  insurance  in  the  quality  of  mori 
gagee  and  afterwards  become  owner  of  the  property  th 
l)olicies  should  be  at  once  altered  to  correspond  with  th 
changed  conditions. 

The  eighty  per  n  nt  co-insurance  clause  is  not  alway 
fully  understood.  The  eighty  ])er  cent  co-insuranc 
clause  does  not  affect  the  settlement  of  a  loss  when  th 
property  insured  is  totally  destroyed,  or  when  it  is  iii 
sured  for  eighty  per  cent  or  over  of  its  actual  cash  valu( 

^Vhen  a  property  insured  for  less  than  80  per  cento 
its  actual  cash  value  is  oidy  partially  destroyed,  th 
amount  recovered  under  a  ])olicy  containing  this  claus 
bears  the  same  ratio  to  the  loss  as  the  amounts  of  insui 
ance  carried  bears  to  the  amount  required  to  be  carriec 
namely,  80  per  cent  of  its  actual  cash  value,  e.  g.: 

iVctual  cash  value $10,000 

Insurance  carried,  fiO""; 6.000 


MISCKI.LANKOIJS 


387 


liiMiraiice  reiiiiired  by  clause,  80^ ,'  ....      8,000 

Loss 5,000 

liiM-'aiifc  payable  under  policy 3,750 

li.OOO 

or  '  I  of  loss. 

8,000 

111  other  words,  the  company  insured  the  property  for 
so.ooo  and  the  insured  carried  one-fourth  or  $2,000  of 
the  risk  iiiniself. 

The  dates  of  expn-y  of  all  policies  held  by  the  bank 
should  he  entered  in  the  manager's  diary  and  the  entries 
checked  by  a  second  officer.  Care  should  be  taken  to  see 
that  insurance  is  never  allowed  to  lapse,  and  that  renewal 
receipts  or  new  policies  are  obtained  by  the  bank  before 
the  expiry  of  the  existing  insurance. 

•i.5.}.  Telegrams,  etc. — Every  bank  has  its  own  tele- 
<fra|/li  code,  copies  of  which  are  supplied  to  the  branches 
and  correspondents  with  full  instructions  regarding 
check  words  and  other  safeguards  for  the  transmission 
of  money.  City  branches  generally  have  copies  of  most 
of  the  standard  commercial  codes.  In  the  case  of  tele- 
firaphi:-  transactions  between  branches  the  despatching 
office  usually  credits  the  amount  to  telegraph  suspense 
account  to  a^ait  the  relative  debit  from  the  receiving 
office.  The  latter  is  in  the  form  of  a  debit  slip  and  is  for- 
warded in  the  checks  remitted  list.  The  despatching 
office  should  invariably  confirm  the  message  by  letter  by 
finl  mail,  giving  the  translation  of  the  code,  but  under 
no  cireunistances  should  the  actual  code  wording  itself 
he  a(h  ised.  Care  should  always  be  taken  to  avoid  giving 
an  oj)portunity  to  any  outsider  to  compare  a  code  mes- 
sacfe  with  the  translation. 

The  object  in  using  a  code  Is  two-fold — secrecy  and 
ecoiKimy.    Discretion,  however,  should  be  used  in  coding 


388 


liANKING    J'UACTICK 


all  niessa^res  not  transfcrrin^r  money,  as  valual,le  time  is 
lost  at  both  ends  in  the  codin^r  and  translation  of  mes 
sages.    Open  messages,  or  message^       rtly  in  eodc  and 
partly  open,  will  IVe«,uently  he  just  .,.  satisfaetorv,  with 
the  additional  advantage  of  kMiig  (luicker. 

236    Clearing  //o,/*r*.— Praetieally  all  the  eities  in 
C  anada  now  have  their  own  clearing  houses  managed  bv 
a  committee  chosen  from  among  the  local  bank  man- 
agers.   The  work  of  a  clearing  house  in  Canada  is  con- 
fined almost  entirely  to  the  clearing  itself,  which  takes 
place  each  day  at  ten  c/clock  in  the  morning.    The 
mechanism  of  a  clearing  house  is  so  well  known  that  it  is 
unnecessary    to    describe    it.     It    might,    however,  be 
pointed   out   that   Canadian  banks   redeem  their  bills 
^irough  the  clearing  in  addition  to  the  usual  checks 
This  necessitates  the  taking  of  a  great  many  more  pre- 
cautions  than  are  usually  required  when  only  checks  are 
cleared.    In  addition  to  the  clearing  clerk,  two  men  are 
necessary  to  safeguard  the  parcels  to  and  from  the  bank. 
A  bank  in  a  clearing  house  of,  say,  eighteen  would  de- 
iver  eighteen  parcels  of  cash  and  checks  on  the  other 
banks  and  Mould  receive  in  return  eighteen  packages  of 
its  own  notes  and  checks. 

The  rules  governing  branch  clearing  houses  m  Canada 
are  practically  uniform,  as  they  have  to  be  approved  of 
by  the  Canadian  Hankers'  Association.  Although  in 
some  cities  the  volume  of  business  Avould  warrant  a 
second  clearing  there  has  been  no  attempt  to  hold  two 
clearings  during  the  day.  A  second  clearing,  sav,  at 
one-thirty  or  two  o'clock  in  the  afternoon,  would  be  of 
great  advantage  to  all  concerned  and  is  worthy  of  con- 
sideration. The  cash,  of  course,  need  not  be  redeemed 
on  the  afternoon  clearing,  which  would  simplify  the 
procedure. 


MISCELLANEOUS 


389 


In  niniparin^  tlic  total  weekly  clearing  of  Canadian 
cities  ^\itll  those  in  the  United  States  it  should  always 
be  borne  in  mind  that  the  figures  for  Canadian  cities 
(Id  not  by  any  means  represent  the  total  clearing.  A 
vt'iv  large  amount,  representing  transactions  between 
hranclies,  is  not  shown  in  the  clearing  totals.  Under 
the  iVnierican  banking  system,  without  branches,  these 
transactions  are,  of  course,  included  in  the  clearing 
totals. 

Clearing  settlements  between  banks  are  made  gen- 
crall>  with  legal  tender.  In  places  where  there  is  no 
clearing  house  the  banks  deliver  the  parcels  to  each  other 
and  obtain  a  receipt  by  entry  in  a  pass-book.  After  two 
banks  have  deposited  with  each  other,  the  differences 
between  the  two  deposits  is  the  balance  due  one  or  the 
other,  and  is  settled  by  a  draft  on  the  nearest  large 
center.  Sometimes,  when  the  differences  are  not  large, 
a  settlement  draft  is  only  given  at  the  end  of  the  week, 
or  when  the  balance  reaches  a  certain  stipulated  amount, 
say.  one  to  two  thousand. 

2J7.  Guarantees. — Guarantee  bonds  are  a  dangerous 
form  of  security,  liable  to  be  voided  by  what  may  appear 
to  be  a  most  trivial  incident  not  affecting  in  any  way  the 
equities  of  the  situation. 

A  special  form  used  by  banks  is  given  in  Figure  82. 
In  cases  where  a  guarantor  is  also  a  creditor  of  the  bor- 
rower it  is  frequently  advisable  to  obtain  a  postponement 
of  the  former's  claim  in  favor  of  the  bank. 

It  must  not  he  stated  to  persons  who  contemplate  be- 
coming guarantors  that  "it  is  a  mere  matter  of  form," 
"They  will  probably  never  be  called  upon  to  pay  any- 
thing," or  the  like.  It  has  been  held  in  the  past  by  the 
courts  that  such  representations  released  the  sureties 
from  liability.    Never  make  settlements  with  obligants 


UCAHANTHK    BOND    ANI,    HO«TPONKMBNT    OF    CLAIM 


To  Thk  Manaoeh 


BANK 


agweingtodetJwith 


In  Consideration  of  The  Canadian  Bank  of  Commerce 

herein  referred  to  nx  "tlie  riwi,m...t- ■■  ;..   .1 , ; 

signed  hereby  Jointly  an    Lv  r    k"' J  '  "'"'  "'  ""  ''""""^  "  »  »«■'''.  *>>•  uad.r- 

the  customer  ha.s  incur  red  r  i  under  "?'  '"""""."  '"  ""  """''  °'  ""-'  ""bilitie.  Xh 
from  dealing.  Uaween  tl.o  bI itV     :  uir^^ 

Bank  „.„y  beoon.e  in  any  manner  V^l^'rTZZ  of't'L  .  '''"*""•'  '^  ""''"  '^ 
the  undersigned  hereunder  bein^  lin.ited  to  the  su,^  '"  '""'"""^  '""'  "^"ility  of 
wUh  mtereH  from  the  date  of  den.and  for  payment  of  the  same) """"' 

customer  and  with  other  part  e!  and  ieu  U  s    l"Tt  "'"'  """'*''*  •^'='"  "'""  '^^ 

all  moneys  received  from  the  customer  or  .T      ,r  '  '"'"'  ""  ^*'  ""''  """y  »PP'> 

customer's  indebtedness  as  it  mav  th!nk  b^  "7,  ,  ""  "7"'"''  "P°"  '"''''  P""  <>' 'h 
or  lessening  the  .ability  of  the  u.S^' :::^:l!:'^-^  -  -  «■»■  -y  .in>iti^ 

but  tf  Brk-^st:  brLrd'-.^rurrr ""'"'"'-  ''^'--  ^-  -  ">«  '^'^^^ 

parties  or  the  securities  it  nmrhold  before  bl^LTZT  "'""'''  ""  '^"^""""  <"  "'^^ 
of  the  amount  hereby  guaranteed  "  '^  '°  '"'^■'"^°'  '"""  "><=  undersigned 

the  .rr ma?  ^'r  t  cVm^e  unirtfir r^'-^'^-e:!  '-".  «"'  ''"  '^'^^^  ^^^^ 
i..trators  of  the  undersigned  slmll  haveM  It  T  u"""''  "'  ""^  "'""'o"  ""d  "dmin- 
advances  on  the  sc-cu'ty  oflS'i^JX^^^ 

changeTirth:  tZlZ  ItVustr ra^ttn^  -od  notwithstanding  any  change  „. 
customer's  firm  by  death  or  by  reUrement  o  on.'  "  ''"1"T"  '"  '^^  ""^'"be'^Wp  of  the 
duction  of  one  or  more  other  partner!  "'°"'"  °'  """  ""'"""•  °'  ''^  '»'« i"'^-- 

uance°of  t's^Zrant? be'S  byM^r,"  °°\''"'  °^  "'>'^''  '"''^-  '»-"«  '"o  -«- 
security  of  the  Bank,  and  as  t Ueen  the " „  .""''"i  " ^l  "'  '^"^  ""  '"'  »'"'  '-^^' 
to  the  debts  and  claims  a,Zn.tZouTj''Tt'''''^  '^'  ^""^  ""  ^""^^  P'-'PO-"' 
may  be  held  by  the  BaZand  u^td  he  Barh  '  "'■ "'/'  '"""«  '"'•*  -"»'"-« 
debt,  and  claims  anv  such  debt,  and  clLm,  f  ^^  "T""'^  '"''''"'"''  '"  '""  «>'  '''  "^-i 
colleeted.enforced  or  proved  ,ubecUo  and  ftt  *»"" '""^"""""^  -  any  of  them  shall  be 
received  by  the  undersigned  or  anTofthi'''''^'"r'*'"'''''^''''"'^"*-''"''»''>''"''"^>» 

Given  Under  Seal  at thi. 


day  of.. 


Witness: 


FiauRB  82 
390 


MISCELLANEOUS 


891 


willioiil  llif  consent  of  the  sureties;  this  would  prohuhly 
irlcaM'  the  f?uaraiitors  from  liahihty. 

It  ri'(|iiires  to  be  borne  in  mind  and  guarded  -af^ainst 
tliat  a  bond  of  guarantee  would  become  ineffective  if  the 
Inisiii.'ss  of  a  firm  or  individual  were  converted  into  u 
stock  company,  or  if  the  ownership  of  a  business  changed, 
altliou'ih  the  same  business  style  should  be  continued. 

2.)8.  Poiccr  of  at  tome//. — The  original  of  any  power 
of  attorneys  should  be  permanently  lodged  with  the  bank, 
uiiltss  it  has  been  filed  in  a  city  or  county  registry  office, 
in  wliich  case  a  certified  copy  under  the  hand  and  official 
seal  of  the  registrar  may  be  accepted.  A  notarial  eo[)y 
(if  a  i)()\ver  of  attorney  which  remains  in  the  hands  of  an 
attorney  cannot  be  acted  upon.  As  a  rule,  however,  the 
powers  of  attorney  are  executed  on  forms  provided  by  the 
i)aiik  (Figures  83  and  84).  A  power  of  attorney  must 
not  he  witnessed  by  the  party  in  whose  favor  it  is  drawn 
and,  as  a  general  rule,  should  be  delivered  to  the  bank 
by  the  grantor  and  not  by  the  attorney. 

Where  an  instrument  is  executed  before  a  notary 
j)ubhc  in  the  Province  of  Quebec  and  the  original  left  on 
record  in  his  office,  a  copy  certified  by  the  same  notary 
may  he  accepted.  A  notary  in  the  Province  of  Quebec 
is  a  j)ul)lic  officer  and  authorized  to  act  as  a  depositary 
for  sucli  documents. 

Bear  in  mind  always  that  the  authority  conferred  by 
a  power  of  attorney  is  closely  circumscribed  to  the  acts 
wliieli  it  specifies  by  the  most  strict  reading.  Unless 
specially  authorized  an  attorney  for  a  customer  cannot 
liyj)()tlieeate  collateral  to  the  bank. 

An  overdraft  created  by  check  signed  by  an  at- 
torney is  not  binding  upon  the  ])rineipal  unless  the  power 
of  attorney  granted  by  him  expressly  specifies  that  it 
confers  power  to  overdraw,   for  which  the  principal 


ft; 


n 


P<)WKI(    OF  ATTOHNET 
H  LI.      t)UM 


Know  All  Men  by  tiiumi;  I'KEsKNTa  that 


Fill  in  here 
till'  imiiif,  busi- 
iiea!<  u  II  (t  |„|. 
il  r  <•  a  M  o(  tin- 
Attoriwy, 


of 


prosonts  mu.l..  con.litut...l  and  appointed  the  true  and  law  J 
Attorney  of  the  undersiimed 


!)>■  th«- 


Jill    in    hrre   ■ 
the  name,  bini- 
n<?9«    and    a<l- 
d  r  i-  a  s    of    tlii;   of  . 
Customer. 


^r  and  .„  the  name  of  the  un.lersiKncd  to  .Iran;  accept,  „>,. 
rmke,  endorse,, ,cyonatc  and  dispose  o/ull  or  any  BilU  of  Exohan« 
Promissory  Notes.  Chcvks.  and  Orders  for  the  payment!! 
num.^.  to  pay  and  rcveive  all  moneys  and  to  give  acquittance, 
for  the  .same;    to  discount  or  <ieposit  with   or  transfer  to  the 

,.„, ,      ■, ^''^^  "ny  negotiable  paper,  Slocks, 

Bonds  and  other  .s«-urities:    to  draw  and   sign   dl   Check, 
Orders  and  Drafts  for  payment  of  money  on  The  .said  elk 

.f  h  Vn t""i  r  "'""""*  °^  *•'"  undersigned  with  the  same 
•f  h.>  shall  tlnnk  fit;  to  arrange,  settle  and  Ulance  all  lKK,k, 
and  accounts,  and  to  sign  the  Bank's  form  of  settlement  of 
balanees  and  release;  and  generally  for  and  in  the  name  of  the 
undersigned  to  transact  with  the  said  Bank  any  business  he 
may  think  fit;  and  all  that  the  said  Attorney  shall  do  by  vi^ 
hereof  is  hereby  ratified  and  confirmed. 

The  said  Bank  may  continue  to  deal  with  the  said  Attorney 
under  this  power  until  notice  of  the  revocation  hereof  has  beei 

Branch  of  the  said  Bank  at  which  the  account  of  the  undersigned 
«  kept,  and  until  such  notice  in  writing  has  been  given,  the 
acts  of  the  said  Attorney  hereunder  with  the  said  Bank  shall 
be  binding  on  the  undersigned. 

In  Witv».ss  wiiEHEOK  these  prc-sents  have  been  executed  by 
the  undersigned  at.. 

the ,^y  ijj 

One  Thoii.s,Hnd  Nine  Hundred  and 


Wit 


.NK.S.S 


FlClRE  8.'{ 

3U2 


POWKII    OF   ATTORSET 

I.IM1TKD    KOKM 

WITH   I-OWKIl  TO  OVF.RDKAW 


Know  all  Men  by  these  Presents*  that 


i      fill   in    »'•"•    

III.- nrnv,.!)""!-       f 


II  ri  (1  ttil- 
,1  r  !■  ■'  ^  <<f  ''"-■ 
Attoriify. 


Fill  ill  here 
l!ii'  ii:irii(',  biiti- 
iH'^.-i  11  ri  tl  atl- 
(i  r  I'  H  K  of  tbc 
Customer. 


has  IxH-n  made,  constituted  and  appointed,  and  is  by  these 
pn'st-nts  made,  constituted  and  appointed  the  true  and  lawful 
Attorney  of  the  undersijjned 


of. 


for  and  in  the  name  of  the  undersigned  to  endorse  all  or  any 
Bills  of  Exchange,  Orders,  Drafts  and  Checks  for  de  -isit  with 

the Bank,  to  draw  and  sign  all  Checks, 

The  Borda  in    Qrders  and  Drafts  for  payment  of  money  on  the  said  Bank, 

it:ilir-s  may    be  ,  ,       ■         i      ■  l     t.  -f  L 

mil-.!  out  if  the  and  to  overdraw  the  account  of  the  undersigned  witn  the  same  ij  ne 
t!,"havi;'  poweJ  shall  think  fit;  to  arrange,  settle  and  balance  all  booka  and 
tu  overdraw.  accounts,  and  to  sign  the  Bank's  form  of  settlement  of  balances 
and  release;  and  generally  for  and  in  the  name  of  the  under- 
signed, to  transact  with  the  said  Bank  any  business  that  may 
be  necessary  in  the  premises;  and  all  that  the  said  Attorney 
shall  do  by  virtue  hereof  is  hereby  ratified  and  confirmed. 

The  said  Bank  may  continue  to  deal  with  the  said  Attorney 
under  this  power  until  notice  of  the  revocation  hereof  has  been 
given  in  writing  to  the  Manager  or  Acting  Manager  of  the  Branch 
of  the  said  Bank  at  which  the  account  of  the  imdersigned  is 
k  jit,  and  until  such  notice  in  writing  has  been  given,  the  acts 
of  the  said  Attorney  hereunder  with  the  said  Bank  shall  be 
binding  on  the  undersigned. 


In  witness  whereof  the.se  presents  have  been  executed  by  the 

undersigneti  at the day  of 

One  Thousjind  Nine  Hundred  and 


Witness 


FiauHE  84 
393 


394 


BANKING    PIlAdKI.: 


11 


11 
If 


...Mlerlakcs  to  l,e  .vsponsihl..  Kvny  such  p.nvcr  of  al 
lorncy  .slunihl  stipulate  a  n.axiiniini  limit  <,f  (uerdraft 

Immediately  on  receipt  of  a  power  of  attorney  il 
should  l>e  recor<le<l  in  the  proper  register  and  the  nL. 
sary  notations  made  on  the  dei)()sit  led|?er 

When  a  po^yer  of  attorney  is  revoked  the  revocation 
may  be  acknowledged,  but  under  no  circumstances  should 
a  power  of  attorney  once  IcKjged  with  a  bank  be  sur- 
rendered. " 

A  power  of  attorney  is  terminable  by  the  following 
causes :  ° 

(a)  Revocation  by  the  principal, 

(h)  Renunciation  by  the  attorney. 

(c)  Dissolution  of  a  partnership! 

(d)  Loss  of  civil  rights  or  civil  capacity  (as  inter- 

diction). 

(e)  Death  of  the  principal. 

(f )  Bankruptcy  of  the  principal. 

Care  should  be  taken  to  procure  properly  certified 
copies  of  the  by-laws  or  resolutions  authorizing  officios 
to  sign  for  incorporated  companies,  municipalities  and 
other  similar  bodies.  These  should  be  entered  in  the 
register  m  the  same  manner  as  the  powers  of  attorney. 

Ihe  individual  signature  of  each  partner  of  a  firm  is 
necessary  for  the  effective  execution  of  powers  of  attor- 
ney, bonds  of  guarantee,  endorsements  or  acceptances 
?nlT^'  7  the  benefit  of  the  firm's  business,  and  all 
formal  deeds  and  instruments.  For  example,  a  note 
made  or  endorsed  m  the  firm  name  by  one  member  of 
the  firm  only,  not  for  the  benefit  of  the  firm,  but  for  his 
own  accommodation  or  the  accommodation  of  another 
person,  would  be  binding  upon  that  partner  alone,  and 
not  upon  his  firm. 


MISCKLLANKOUS 


S05 


'lilt  |)i<|Krly  antliori/r<l  si<;iiin^  olliars  of  a  iiitiiiii'i< 
pal (oipiiiatioii  whose  checks  are  a  correct  charge  against 
a  cmlit  hulaiice  may  not  create  a  debt,  which  an  over- 
(lial't  uoiild  he,  nnless  anthorized  by  by-law  to  do  so. 
Il(i\vc\rr  temporary  jin  advance  o  a  corporation  may 
k.  a  l)V-la\v  or  resohition  authorizing  it  must  l>e  passed 
and  a  (rrtified  copy  of  it  should  invariably  l)e  lodged 
with  the  liank.  Such  resolution  should  state  the  source 
I'loni  wliitli  paynjcnt  is  to  be  made,  such  as  taxes,  for 
txaiiiple,  and  should  also  provide  for  renewals,  if  neces- 
sary. 

•«'.)'.>.  Moncji  parcels.—  The  regidations  regarding  the 
imipt  and  despatcb  of  money  parcels  are  very  strict  in 
Caiailian  hanks. 

All  parcels,  M'hether  sent  by  mail  or  express,  must  be 
(oiintcd  by  two  officers  in  the  presence  of  each  other, 
iiiaile  into  compact  packages,  and  sealed  so  that  the  seals 
will  not  be  broken  in  transmission;  the  intention  being 
that  in  case  of  loss  or  dispute  the  two  officers  may  be  able 
ti)  s'vcar  jjositively  that  the  money  was  counted  and 
Staled  in  each  other's  presence,  kept  in  joint  custody 
and  delivered  by  them  to  the  post  office  or  express 
tonipany  without  having  once  been  out  of  their  joint 
I)f)ssession. 

T!u'  clearing  house  rides  of  the  different  cities  call  for 
t(|iially  effective  checking  by  two  men,  both  for  parcels 
reteived  and  delivered  through  the  clearing  house. 
Two  clerks  properly  authorized  are  required  to  co- 
()j)cr.'ite  in  receiving  registered  mail  from  the  post  office 
(or  to  deliver  or  receive  clearance  from  the  local  banks) . 
l){)th  of  whom  invariably  examine  and  count  the  number 
of  ji.u'kages.  examine  the  seals  of  all  parcels  and  letters 
I'oceived  before  giving  a  receipt.  Registered  letters  in- 
ward shoidd  be  entered  in  the  register  book  according 


396 


BANKINT,    PHACnCE 


lo  lilt'  local  post  aiVnT  niiinlHr  at  IIk-  |ii»sl  otYnv,  iiiid  H,, 
iHiiiihcr  ol*  Ictttrs  and  |m»'kaKr.s  tvilifii.l  l„  |,y  t|,c  |„,si 
master  before  they  are  handed  to  the  iimnager. 

Outjroing  registered  letters  should  also  l)e  in  diarj^, 
of  two  olfieers  anil  receipts  obtained  at  the  i)ost  ortia-  ii 
the  presence  of  each  other  and  the  book  returned  to  tlu 
manager  or  accountant.  The  register  book  should  nevei 
be  left  at  the  ])ost  office. 

All  incoiiiin^r  parcels,  letters  containing  cash  and  otlui 
important  packages  are  retained  in  joint  custody  unti; 
they  have  been  opened  and  counted  by  the  teller  in  tlit 
presence  of  another  officer.  In  opening  parcels  the  seals 
should  never  l)e  broken,  but  the  \vrai)per  cut  around  same 
so  that  the  intact  sealing  may  be  used  as  evidence  of  tlit 
amount  originally  enclosed  in  parcel. 

260.  Vaults  ami  safes. — The  rules  governing  the  cus- 
tody of  a  bank's  securities  as  represented  by  the  control 
of  the  vaults  and  safes  are  very  strict,  the  intention  king 
that  under  no  circumstances  should  a  strictly  divided  cus- 
tody be  departed  from.  This  custody  must  be  so  regu- 
lated that  the  co-operacion  of  two  officers  shall  at  all 
times  be  necessary  to  afford  access  to  either  the  vault  or 
safe.  Xo  officer  should  communicate  his  combination  or 
surrender  his  key  to  another  unless  such  transfer  be  ren- 
dered necessary  by  his  absence  or  removal,  and  then  in 
such  manner  only  as  shall  not  impair  the  absolute  divi- 
sion  of  custody  above  prescribed. 

A  safe  is  not  opened  except  in  the  presence  of  the 
officers  res])onsible  for  the  contents.  The  treasury  com- 
partment should  never  be  ()i)ened,  remain  open  or  be 
closed  unless  all  the  officers  holding  combinations  or  keys 
giving  access  to  it  are  present. 

Two  senior  officers  at  a  branch  generally  have  custody 
of  one  of  the  locks  on  the  outer  door  of  the  safe  and  one 


Mis(  i;ij,am:<H's 


807 


lotk  til  llir  Irtasiiry  coiupartinciit  is  in  llic  sole  control 

'lilt  luroiiiitaiit  >viiHk  ii|>  the  tiiiK'-l(K'k  in  the  morn- 
iii^r  ;is  snnii  iis  tlic  salV  or  vault  jloor  to  which  it  is  al- 
tiuliid  is  opened.  Tlie  lock  is  set  tor  the  full  time,  whicli 
iiiiisf  rlapse  until  the  morning  of  the  next  husiness  day, 
anil  Im  r<»re  leaving  the  office  in  the  aftern(Km  the  man- 
ager c'liceks  the  numl)er  of  hours  the  movement  has  still 


VAULT  DOOR 

Tlmo  when 
lorknl. 

InitialH  of  Offlccra 
(hriminK  iiff  riim- 

1  iiiBtiorui  ami 
rolling  time-lock.'' 

P.M. 

SAFE  DOOR 

UmR 

P.M. 

Lower 

P.M. 

TIME  LOCK 

HOURS  TO  RUN 

WHEN   OOOR 

LOCKED 

to  rim,  puts  up  tlie  lever  and  sees  that  the  door  is  then 
closed,  ir  the  manager  is  obliged  to  be  away  from  the 
office  at  locking-up  time  he  must  specifically  depute  this 
duty  to  some  officer  other  than  the  accoimtant.  It  is  the 
intention  of  this  rule  to  provide  that  two  officers  shall  be 
jointly  responsible  for  the  proper  operation  of  the  time- 
lock,  and  it  is  the  duty  of  each  one  to  see  that  the  other 
does  not  have  it  in  his  power,  by  failing  to  wind  up  the 
mov-ment  for  the  full  time,  by  omitting  to  raise  the 
lever,  or  by  any  other  means,  to  render  it  ])ossible  to 
open  the  door  before  the  proper  time.    The  closing  time, 


;5f)8 


I 


.a 


BANKING    I'UACTKi: 


etc-.,  is  noted  and  initialed  ])y  the  two  officers  either  in , 

special  book  or  on  the  teller's  hook.    A  rubber  stamo  U 

sometimes  used  for  uniformity  of  record.  ^ 

261.  Lost  chcchx  and  drafts.— Koikes  of  lost  drafts 

and  checks  should  be  recorded  in  the  Stop  Payment 

Register  as  soon  as  received.    In  the  smaller  offices  a 

pass-book  can  be  used  for  this  purpose.    All  such  no 

tices  must  be  read  and  initialed  by  the  proper  officers 

No  duplicate  draft  should  be  issued  unless  reason^ 

able  proof  is  furnished  that  the  original  has  been  lost 

or  destroyed,  and  a  satisfactory  bond  of  indemnity  for 

double  amount  be  obtained.    Notices  stopping  payment 

should  be  sent  to  the  drawee.    Care  should  be  taken  I 

see  that  the  duplicate  corresponds  in  every  particular 

as  to  date,  number,  and  other  details,  with  the  original 

and  that  "Duplicate"  is  vyritten  plainly  across  the  face 

ot  same  in  red  ink. 

When  drafts  payable  to  a  chartered  bank  or  repu- 
table  insurance  or  loan  company  are  lost,  and  dupli- 
cates applied  for,  a  bond  of  indemnity  as  a  rule  is  not 
asked  for. 

When  an  accepted  check  is  lost  a  stop  payment  notice 
m  writing  is  taken  from  the  customer  on  a  form  similar 
to  the  following: 


STOP  PAYMENT  NOTICE 


THl^  MANAGER 


.191. 


BANK 


Please  Stop  payment  of  check  No .dated 

'^*         '  <lrawn  by jn  favor  of.  .....' 

and  endorsed  by foj.  a 


Received o'clock  '^•^• 

P.M. 


MISCELLANEOUS 


399 


This  is  recorded  in  the  register  as  above,  the  ledger- 
keeper  and  teller  being  particularly  concerned.  Both 
of  these  officers  generally  keep  a  list  of  lost  checks  for 
ready  reference  and,  in  addition,  the  ledger-keepers 
paste  a  small  notice  to  the  following  effect  in  the  ledger 
account; 

STOP  PAYMENT  of  check 


dated 191. 


.,  for  $. 


Xo 

in  favor  of 

and  endorsed.     Duplicate  issued. 

This  notice  is  printed  on  a  distinctive  colored  paper, 
either  red  or  yellow. 

The  same  care  should  be  exercised  in  accepting  a 
(hipHcate  or  in  refunding  the  amount  to  the  drawer 
as  is  taken,  in  issuing  a  duplicate  draft.  A  satisfactory 
bond  for  double  the  amount  should  be  taken.  The  rea- 
son for  the  bond  being  for  double  the  amount  is  due  to 
the  fact  that  tlie  bank  is  continuously  liable  for  an  ac- 
cei)ted  clieck  in  the  hands  of  a  third  party  until  it  is  paid, 
and  might  be  called  upon  to  pay  the  original  under  cer- 
tain conditions.  The  recourse  against  the  drawer  should 
therefore  be  sufficient  to  cover  legal  and  other  expenses 
in  addition  to  the  amount  of  the  draft. 

In  the  case  of  stop  payment  notices  being  received 
(in  an  nnacoepted  check  the  same  procedure  is  followed, 
with  the  exception  that  no  bond  is  given.  Stop  pay- 
ment notices  on  checks  should  be  made  immediately  op- 
erative in  the  office,  as  even  a  slight  delay  might  allow 
the  ori<3final  check  to  be  paid  in  the  interval,  in  which 
case  the  bank  would  probably  be  held  liable. 

2iV2.  Customers'  rviUs.  —  Under  ordinary  circum- 
stances pnd  speaking  generally,  the  business  in  which  a 


400 


BANKING    PUACTICE 


|: 


man  is  engaged  at  the  time  of  his  death  must  be  liquj. 
dated  by  his  executors  or,  if  he  is  a  member  of  a  firm 
by  the  surviving  partners,  without  the  expenditure  oi 
further  moneys.  In  many  eases,  this  would  entail  he&v) 
loss. 

For  this  reason,  it  is  very  desirable  that  every  bor- 
rowing customer  should  be  influenced  to  provide  in  his 
will,  power  to  his  executors  to  continue  his  business 
after  his  death  until  it  can  be  profitably  liquidated, 
Deeds  of  partnership  should  also  make  similar  provi- 
sions. 

Managers  should  bear  this  matter  in  mind  in  con- 
nection with  every  impoitant  account  in  their  books 
and  should  see  that  the  necessary  provision  is  made 
A  bank  has  a  right  to  press  this  as  a  condition  of  lend 
ing  its  money. 

The  borrowing  powers  of  executors,  if  they  have  any 
are  determined  by  the  will  of  the  testator.  Upon  thi 
decease  of  a  borrower  the  conditions  of  the  will  shouk 
be  ascertained,  and  unless  authority  is  specially  givei 
thereunder  the  executors  cannot  legally  borrow  or  re 
new  any  note  which  may  be  running. 

263.  Secrecif. — As  the  success  of  a  bank  depend 
largely  upon  the  estimation  in  which  its  officials  are  hek 
by  the  public,  and  the  degree  of  confidence  which  it  i 
felt  can  be  placed  in  them,  it  is  necessary  that  the  strict 
est  secrecy  be  observed  in  connection  with  all  trans 
actions. 

It  is  essential  that  conversation  between  members  o 
the  staflF  in  the  office  relativ.e  to  the  bank's  business  mus 
be  conducted  in  such  a  manner  that  it  will  not  be  over 
heard  by  any  customer. 

Money,  securities  or  valuable  papers  should  neve 
be  left,  even  momentarily,  on  the  counter  or  desks,  bu 


MISCELLANEOUS 


401 


should  be  at  once  put  away  by  tbe  officer  responsible. 
tare  should  also  be  taken  tbat  no  books,  notes,  letters 
or  other  documents  are  so  placed  as  to  be  legible  or  in- 
telligible to  the  public. 

Xo  conversation  should  be  held  over  the  telephone 
relative  to  a  customer's  account,  unless  there  is  no  pos- 
sibility of  being  overheard. 

•J(!4.  Education. — In  the  charter  of  the  Canadian 
Bankers'  Association,  clause  five  reads  as  follows: 

The  object  and  powers  of  tlie  association  shall  be  to 
promote  generally  the  interests  and  efficiency  of  banks  and 
bank  officers,  and  the  education  and  training  of  those  con- 
templating employment  in  banks,  and  for  such  purposes, 
among  other  means,  to  arrange  for  lectures,  discussions, 
competition  papers  and  examinations  on  commercial  law 
and  banking  and  to  acquire,  publish  and  carry  on  the 
"Journal  of  the  Canadian  Bankers'  Association." 
For  the  first  few  years  of  its  existence  the  associa- 
tion gave  particular  attention  to  this   feature  of   its 
work,  ])rizes  were  offered  for  essays,  and  the  associates 
Mere  encouraged  to  attend  annual  meetings,  read  pa- 
l)er.s,  and  take  part  in  general  discussions.    The  move- 
ment unfortunately  did  not  meet  with  the  support  of 
some  of  tlie  banks,  which  naturally  discouraged  those 
who  hiul  taken  a  keen  and  personal  interest  in  the  work, 
and  with  the  increase  of  the  special  duties  of  the  asso- 
eiati(»n  imposed  by  the  Bank  Act,  Clause  5  was  gradu- 
ally allowed  to  l)ecome  a  dead  letter.    The  Journal  of 
the  Canadian  Bankers'  Association  contirmes  to  be  pub- 
lished quarterly  (the  first  number  appeared  in  Septem- 
ber, 1893),  and  contains  much  valuable  and  interesting 
matter  relating  to  banking  practice  and  law.     Its  cir- 
culation, however,  is  limited,  though  it  should  be  much 
larjfer. 

C-  Vni  -2B 


403 


BANKIKG    rUACTICE 


It  is  generally  acknowledged  that  the  banks  made  i 
serious  mistake  in  not  being  unanimous  in  their  sup 
port  of  this  educational  clause,  and  at  the  annual  meet 
ing  of  the  Canadian  Bankers'  Association  in  November 
1913,  a  committee  was  appointed  to  revive  the  wholi 
question.  In  the  meantime,  several  of  the  banks  havi 
inaugurated  courses  of  instruction  for  those  of  theii 
staff  who  are  ambitious  to  follow  banking  as  a  pro 
fession. 

Every  young  man  entering  a  bank  should  look  upoi 
his  first  few  years  in  the  bank  in  the  light  of  a  coUegf 
course,  and  make  up  his  mind  to  study  and  improve  him 
self.  A  youth  cannot  leave  school  and  become  a  lawyei 
or  doctor  without  a  five-year  course  of  study.  There  ii 
just  as  much  to  learn  in  banking  as  there  is  in  any  otiiei 
professi(?n,  and  to  be  content  with  the  bare  performana 
of  allotted  work  without  preparing  for  higher  positions 
is  to  stamp  a  man  a  mere  clerk.  INIental  exercise  is  jusi 
as  necessary  as  i)hysical,  if  atrophy  is  to  be  avoided. 

The  following  pertinent  remarks  on  the  necessity  foi 
constant  self-improvement  are  taken  from  a  business 
magazine. 

Today  it  is  the  man  with  tlie  l)cst-informed,  best-regulatet 
mind  who  wins.  The  man  who  is  applying  constant  stimulus  tc 
his  mind,  through  acquiring  new  information,  is  the  man  whc 
is  going  ahead.  The  power  that  made  all  the  great  captains 
of  industry,  all  the  great  scientists,  was  mind.  And  that  powei 
w,is  built  by  constint,  never-ending  reaching  out  for  more  in- 
formation, bettor  information,  and  the  gathering  together  ol 
standard  rules  and  principles,  which,  once  known,  abolish  the  ne- 
cessity for  grinding  out  details  over  and  over  again.  The 
amount  of  information  that  a  man  can  get  by  personal  contact 
with  other  men  is  limited,  and  great  captains  of  industry  and 


MISCELLAiNEOUS 


403 


mill  wild  have  come  from  tlie  ranks  to  the  top  will  tell  yon 
tluit  tliev  wt-re  always  reading  other  men's  experiences,  reaching 
out  beifond  their  •particular  work,  to  learn  of  other  men's  ways 
tind  imthods. 

The  man  who  has  handled  only  one  department  of  business 
fails  to  realize  one  tremendous  factor  for  the  acquisition  of 
[lo'vir,  until  he  roads  and  studies  about  other  departments. 
Tlun,  lie  learns  that  through  all  departments  of  business  certain 
l),i>ir  riiks  and  principles  are  running.  He  begins  to  see  where 
lii>  (li'p.irrmcnt  affects  others,  and  where  they  affect  his.  And 
as  liis  mind  becomes  familiar  with  these  laws,  his  knowledge 
hro.uicns ;  he  becomes  inventive.  He  sees  improvements  that 
c'iin  l)e  made,  economies  that  can  be  effected,  difficulties  in  inter- 
(Iipartmontal  relations  that  can  be  smoothed  away.  Each  time 
!u  sti^ffcsts  an  econoni}',  an  improvement,  a  decrease  of  friction, 
his  handling  of  his  department  is  better,  and  his  oxen  growth 
and  coiipdcnce  are  increased  by  the  knowledge  of  his  own  in- 
craiscd  power. 

When  a  man  starts  gathering  information  in  addition  to 
that  needed  in  his  own  work,  and  when,  through  having  devoted 
time  to  getting  that  extra  knowledge,  he  finds  that  he  has  in- 
creased his  efficiency,  it  is  the  old  story  over  again  of  the  lion 
tasting  blood.  Once  he  has  tasted  it,  he  always  wants  it.  And 
so,  a  man  builds  up  the  habit  of  learning  rules  and  principles 
ahead  of  what  he  just  needs  to  do.  When  a  man  gets  absorbed 
in  finding  new  ways  for  developing  himself  and  his  work,  busi- 
ness has  acquired  the  excitement  of  the  gaming  table  or  the  race 
track.     It  ceases  to  be  monotonous  and  is  alive  with  interest. 

The  man  who  is  gathering  information  and  training  his  mind 
for  i)ifrircr  tilings,  can  see  himself  grow  bigger  than  his  work, 
flhtre  once  it  was  bigger  than  he.  Every  man  who  uses  his  mind, 
if  he  Hants  to  get  maximum  efficiency,  must  cease  to  rely  on  his 
own  opinion  on  guesswork,  on  his  own,  pitifully  small  ex- 
perience. There  is  only  one  way  to  handle  men,  and  that  is  to 
help  them.  And  you  cannot  help  them  if  you  do  not  know  more 
than  they  do.    Of  course,  some  men  think  that  handling  men  is  a 


.//  /*»//■ 


Wi 


«A\KIN(;    rUA(TI("K 


Not  by 


trick  that  can  l)o  learned  over  night,  but  it  is  not  so. 
King,  h)ng  way. 

265.  Canadian  Bankers'  Association.—Thh  Asso 
ciation  was  originally  a  voluntary  organization,  formec 
in  1892,  presumably  for  the  common  benefit  of  the 
banks  and  their  officers.  The  association  consisted  ol 
members  and  associates,  the  former  being  the  chartered 
banks  themselves,  and  the  latter  bank  officers  of  all 
banks. 

With  the  incorporation  of  the  association  in  1900, 
the  associates,  notwithstanding  their  legal  status  in  the 
association,  were  gradually  relegated  to  the  position  of 
mere  subscribers  to  the  Journal  and  ceased  to  attend 
the  annual  meeting. 

In  the  Bank  Act  of  1890,  the  banks,  at  their  own 
suggestion,  were  practically  made  joint  guarantors  of 
each  other's  notes,  and  the  logical  conclusion  of  this 
principle  was  to  give  the  banks  a  measure  of  joint  con- 
trol over  the  issue,  circulation,  withdrawal  and  destruc- 
tion of  bank  notes.  The  justice  of  this  was  recognized 
by  Parliament  in  the  revision  of  the  act  in  1900,  and 
the  association  was  given  the  status  of  a  public  corpo- 
ration, by  a  special  act.  The  original  purposes  of  the 
association  were  contiiuied,  with  additional  duties  im- 
posed in  connection  with  supervising  the  note  issues, 
establishing  clearing  houses,  and  so  on,  as  set  forth  in 
Sections  117-124  of  the  Bank  Act. 

The  association  still  consists  of  members  and  asso- 
ciates, the  members  being  the  chartered  banks,  who  vote 
and  act  in  all  matters  relating  to  the  association,  through 
their  chief  executive  officers,  and  the  associates,  con- 
sisting of  the  individual  officers  of  the  various  banks. 
The  latter,  as  mentioned  above,  have  practically  been 
eliminated  from  the  affairs  of  the  association.    Tii  meet- 


MISCELLANEOT^S 


405 


iri-;s  of  tlif  association,  tlic  members  are  represented,  as 
a  rule.  l»y  their  respective  general  managers;  between 
nitrtings  the  interests  of  the  association  are  watched, 
and  its  affairs  managed  by  an  executive  council,  con- 
sisting of  the  president,  vice-president  and  fourteen  of 
tilt'  chief  executive  officers  of  the  members. 

SooM  after  its  incorporation,  the  association  pre- 
pared by-laws  for  carrying  out  the  provisions  of  the 
IJank  Act,  and  these  were  approved  by  the  Treasury 
Hoard,  and  came  into  effect  in  April,  1901.  These  by- 
laws embodied  rules  for  the  establishment  of  clearing 
houses  and  regulations  for  the  appointment  and  duties 
of  curators  of  failed  banks. 

In  the  matter  of  supervising  the  bank  note  circula- 
tion, the  association  prescribed  a  form  of  monthly  re- 
turn of  circulation  which  is  sent  in  by  all  the  banks  at 
the  end  of  each  month,  accompanied  by  a  certificate  of 
tlie  amount  of  notes  withdrawn  from  circulation  and 
burned.  The  latter  must  be  signed  by  the  chief  officer 
and  by  at  least  three  of  the  directors  of  the  bank  con- 
cerned. These  monthly  returns  are  combined  into  a 
statement  and  a  printed  copy  sent  to  each  bank. 

In  addition  to  these  monthly  returns,  an  annual  in- 
sj)eetion  is  made  by  the  association  of  the  circulation  ac- 
count of  every  bank,  and  the  executive  council  may,  at 
any  time,  by  resolution,  cause  a  special  inspection  to  be 
made. 

The  Canadian  Bankers'  Association  is  frequently  re- 
ferred to  as  a  "trust."  This  is  far  from  being  the  case, 
as  apparently  the  requirements  of  the  Bank  Act  are  the 
only  factors  that  have  kept  the  association  in  existence. 
F\e!i  practical  and  neccssaiy  co-operation  in  matters 
of  common  interest  or  against  fraud,  and  burglary,  is 
not  attempted.    The  annual  meeting  of  the  association  is 


406 


BANKING    PHACTICE 


more  or  less  of  a  i)erfunctoiy  character.  Il,e  associa 
tion  has  little  or  nothing  in  common  witli  the  practiw 
work  accomplished  l,y  the  American  Bankers'  Associa 
tion,  which  numbers  many  C^anadian  banks  amonir  it 
inen.bers.  The  present  tendency,  however,  is  in  the  di 
rection  of  a  renewed  interest  in  the  original  purpose 
of  the  association.  This  spirit  will,  no  doubt,  mak, 
itselt  telt  within  the  next  few  years. 

Mr.  R.  M.  Breckenridge,  in  his  "History  of  Bank 
ing  m  Canada,"  included  in  the  reports  of  the  Xationa 
.Monetary  Commission,  refers  to  the  inactivity  of  th( 
association  in  the  following  words: 

Apart  from  the  supervision  of  circulation  accounts  and  the 
more  exact  detennination  of  th.  procedure  in  case  of  suspension, 
the  Canadian  Bankers'  Association  does  not  appear  to  have  nmde 
mucl,  effort  to  develop  the  functions  acquired,  or  to  exten.l  the 
held  of  activity  oi)ened  n.p  by  the  legislation  of  1900.     The  re- 
port of  proceedings  of  the  annual  meeting,  which  has  previously 
been  published  in  the  Journal  of  the  Association  and  the  news- 
papers of  the  day  with  a  degree  of  fullness  which  made  it  prac- 
tically complete,  was  condensed  in  1903  to  the  baldest  sketch. 
Reports  of  later  meetings  were  omitted  from  the  Journal  alto- 
gother.     The  project  of  competitive  papers,  discussions,  lectures 
an.l  examinations   seems  for  some  years  at  any  rate  to  have 
been  abandoned.      Already  in  1903,  a  Committee  appointed  for 
the  purpose  of  enquiry  reported  that  they  "had  failed  in  arous- 
ing sufficient  interest  to  warrant  proceeding  for  the  present  with 
the  formation  of  an  institute." 

26G.  Foreign  branches.~The  Bank  Act  permits  Ca- 
nadian banks  to  open  branches  outside  of  Canada  and 
several  of  the  banks  have  established  branches  or  agen- 
cies m  London,  New  York  and  other  points  in  the 
United  States,  Newfoundland,  West  Indies  and  IVIex- 
ico.    A  study  of  the  list  of  branches  outside  of  Canada 


MISCELLANEOUS 


407 


will  show  that  the  policy  which  governs  Canadian  banks 
in  opening  branches  at  foreign  or  colonial  points  is  due 
Idiiiiiuily  to  the  exigencies  of  their  own  or  their  custom- 
iis'  business,  rather  than  to  any  desire  to  compete  for 
local  business  (in  some  places,  notably  New  York,  for- 
ti<>n  banks  are  proliibited  by  custom,  if  not  by  law,  from 
eii^niging  in  a  general  banking  business ) .  For  instance, 
tlie  maritime  provinces.  Nova  Scotia  and  New  Bruns- 
wick, do  a  very  large  trade  with  the  West  Indies,  and  it 
is.  therefore,  not  surprising  to  find  that  the  only  banks 
which  have  established  branches  there  are  the  Bank  of 
Xova  Scotia  and  the  Royal  Bank  of  Canada  (formerly 
the  Merchants  Bank  of  Halifax),  two  banks  closely 
identified  with  the  maritime  provinces.  The  Bank  of 
Xova  Scotia  has  a  branch  in  Boston  also,  another  point 
with  a  very  large  volume  of  trade  with  eastern  Canada. 
Xo  doubt,  as  trade  in  the  West  Indies  and  Canada  in- 
creases imder  the  new  tariff  agreement,  other  banks 
w  ill  find  it  necessary  to  open  branches  at  various  points. 

On  the  Pacific  Coast,  The  Canadian  Bank  of  Com- 
merce has  branches  in  the  principal  United  States  ports, 
all  of  which  do  a  large  business  with  Vancouver. 

The  oi)ening  of  branches  in  Newfoundland  was  hast- 
ened by  the  disastrous  failure  of  the  local  banks  in  1894 
and  anticipated  perhaps  l)y  a  few  years  the  commercial 
demand  for  representation  at  that  ])oint. 

In  the  case  of  branches  in  I^ondon  and  New  York, 
the  reasons  for  their  establishment  are  based  on  wider 
issues,  for  although  the  special  or  sectional  reasons 
^iven  above  are  important  factors  in  the  establish- 
ment of  branches  at  these  points,  they  are  of  minor 
importance  compared  to  the  maintenance  of  adequate 
reserves  outside  of  Canada,  a  responsibility  which  an  un- 
viitten  law  has  gradually  imposed  on  the  larger  Ca- 


408 


BANKING    PRACTICE 


fiadian  Imnks.  The  facilities  afronled  at  these  cente 
for  international  exchange  operations  form  an  impoi 
tant  corollary  to  these  preniises.  The  value  and  avail, 
hihty  of  balance  and  call  loans  in  London  and  New  Yor 
hin  e  already  been  fully  explained  in  Section  85.  Ne^ 
^  ork  funds  or  call  loans  can  be  converted  into  gold  an 
delivered  either  in  Montreal  or  Toronto  within  twent\ 
four  hours,  and  London  balances  are  equally  available 
through  the  sale  of  cable  transfers  in  New  York. 

Although  London  does  not  encourage  the  establish 
ment  of  foreign  banks,  it,  on  the  other  hand,  doe 
nothing  to  1  strict  the  movement.  This  broad-niinde( 
policy,  though  it  may  perhaps  affect  the  individual  inter 
csts  of  s(,me  of  the  British  banks,  is  of  immense  advan 
tage  to  London  and  the  country  in  general,  and  there 
fore  indirectly  to  the  banks  themselves.  This  freedoir 
in  banking  is  a  leading  factor  in  making  London  the 
clearing  house  of  the  world,  and  insures  its  pre-emi- 
nence as  a  financial  center. 

The  policy  of  New  York  in  connection  with  foreign 
banks  is  just  the  reverse  to  that  of  London,  and  is  ap- 
parently based  on  the  local  and  narrow  point  of  view. 
New  York  would  have  the  most  to  gain  by  an  open- 
door  policy  of  banking,  and  yet  it  is  the  most  stringent 
m  Its  restrictions  against  foreign  banks,  and  were  it 
not  for  the  fact  that  New  Y^ork  is  the  foreign  exchange 
center  of  the  continent,  it  is  probable  that  few  foreign 
banks  would  be  represented  there.     As  it  is,  foreign 
banks  do  not  have  regular  branches  in  New  York  but 
are  represented  by  agents,  generally  the  two  senior  men 
of  the  staff.     This  is  due  to  the  advisability  of  oper- 
ating as  far  as  possible  along  the  lines  of  a  private  bank, 
rather  than  as  a  foreign  corporation. 

It  will  be  seen  from  the  above  that  as  Canadian  com- 


MISCELLANEOUS 


400 


nitrtr  t'xpnruJs  it  will  be  followed  by  tlie  establishment 
of  hraiK-lies  of  Canadian  banks  at  many  other  points 
outside  of  Canada.  Foreign  branches  form  an  excel- 
lent ji(l\ trtisenient  for  Canada,  and  serve  as  a  very  nse- 
I'lil  cliamiel  for  trade  inquiries  and  general  information. 
lU'low  is  a  list  showing  the  foreign  branches  of  the 
Caiiu(liui)  banks: 

Bank  of  Montreal: 

Newfoundland  (8). 
London   (2). 
New  York. 
Chicago. 
Spokane. 
Mexico  City. 

The  Canadian  Bank  of  Commerce: 

Newfoundland. 

London. 

New  York. 

Portland,  Oregon. 

San  Francisco. 

Seattle. 

INIexico  City. 

Bank   of   Nova   Scotia: 

Newfoundland   (9). 
Boston,  Massachusetts. 
Chicago,  Illinois. 
New  York. 
West  Indies   (7). 

Merchants  Bank  of  Canada: 
New  York. 


410 


BANKING    PRACTICE 


II 
11 


;i 


11 
SI 


Roi/al  Hank  of  Canada: 
Newfoundland  (2). 
London. 
New  York. 
West  Indifs   (a«). 

Dominion  Bank: 
London. 

Union   Bank   of   Canada: 
London. 

Bank  of  British  North  America: 
London. 
New   Vork. 
San  Francisco, 
p    •  Banqiic  Nationale: 

267.  Correspondence.  —  The  correspondence  of 
branch  may  be  roughly  divided  into  three  classes,  hea 
office,  routine  and  general.  Head  office  correspondem 
consists  of  letters  on  matters  pertaining  to  loans  (som 
times  known  as  discount  communications)  and  lette 
dealing  with  the  general  affairs  of  the  branch  and  i 
management  (known  as  routine  letters).  The  statioi 
ery  generally  used  for  head  office  correspondence  is  i 
memorandum  form,  the  upper  left-hand  heading  givir 
the  superscription  and  date,  the  subject  matter  and  siil 
heading,  if  any,  being  on  the  right-hand  side,  and  i 
every  case  a  separate  form  for  each  customer  or  subje 
is  used. 

In  the  case  of  letters  dealing  with  loans,  it  is  custon 
ary  to  give  the  name  of  the  customer,  the  present  pos 
tion  of  the  account,  the  date  and  amount  of  the  la 
head  office  authorization,  if  any.  The  balance  of  tl 
letter  is  then  written  along  the  lines  suggested  in  Se 


MlS^'KLI.ANKOra 


411 


lion  iMMK  Tliesi'  (liscmiit  ('ornimiiiicatioii.s  to  lii-ad  otYiic 
urt'  mimljtrcd  consf<*ntivt'Iy  as  written,  hut  art'  tiled 
;il|>liiil)(tically,  either  in  hinders  or  vertical  tiles.  The 
litMil  oflu't'  also  nunihers  its  replies  ami  in(|niries  to  the 
Itniiicii  on  discount  matters,  and  lK)th  are  thus  assured 
that  IK)  important  correspondence  has  heen  delayed  or 
lost  ill  the  mails. 

The  general  or  routine  corres|M)ndenee  with  head  of- 
ticr  is  also  conducte«l  on  numl)ered  memorandum  forms 
(liff'(iin<^  slightly  in  size  or  color  from  the  discount  com- 
iniiiiie.'itions.  A  standard  list  of  headings  covering  all 
the  routine  matters  likely  to  he  the  suhject  of  corre- 
s|»()n(leiiee  with  head  offici ,  such  as  "Statf,"  "Station- 
try."  "Furnishings,"  etc.,  is  used,  under  which  appro- 
priate suh-headings  can  he  raised.  Ihese  letters  are 
filed  under  suhjects,  and  alphabetically  under  sub-head- 
injjs.  at  hoth  offices.  The  numbers  on  an  inquiry  and 
its  re|)ly  do  not  nece**sarily  correspond,  head  office  in- 
quiry No.  142  "Stationery"  may  be  answered  by  the 
branch  under  No.  186  ""Stationerv'." 

Routine  correspondence  generally  consists  of  stereo- 
typed forms  enclosing  check  lists,  collections,  etc.,  both 
despatched  and  received.  Such  letters  received  from 
other  branches,  and  correspontlents  containing  collec- 
tions, etc.,  seldom  have  to  be  referred  to,  as  full  particu- 
lars of  their  contents  are  recorded  in  the  books,  and  the 
payment  or  return  of  the  items  enclosed  practically  ends 
any  necessity  for  reference  after  three  or  four  months. 
so  that  the  manner  of  filing  these  forms  is  not  so  im- 
portant as  of  ordinary  letters.  The  most  practical  way  is 
to  file  them  altogether  by  months,  arranged  in  order  of 
date  of  despatch  or  receipt.  I^etters  received  from  cus- 
tomers containing  deposits  and  the  like  may  also  be 
considered  as  routine  matter  and  kept  altogether  on  sim- 


PS     ! 


412 


BANKING    PRACTICE 


ilar  files,  llontine  lettr-s  ,ar(l  are  generally  writ 
ten  on  a  form  similar  to  Figure  21,  a  carbon  copy  beini 
retained  in  a  book  or  binder.  ' 

General  correspondence  may  I)e  said  to  consist  o 
special  letters  to  the  branches,  correspondents  and  other 
which  do  not  fall  under  the  above  classifications.  The) 
are  written  on  letter  size  paper  and  filed  in  a  vertica 
file  with  the  relative  replies  and  memoranda. 

268.  Bills  of  Ejochange  Act— The  whole  business  ol 
banking  is  so  intimately  concerned  with  negotiable  in 
stmments  and  the  laws  governing  their  existence  and  val 
idity  that  a  fair  knowledge  of  the  general  principles  ol 
the  Bills  of  Exchange  Act  is  essential  even  to  the  young, 
est  bank  clerk,  and  such  knowledge  is  best  obtained  by  a 
study  of  the  act  itself.'  For  this  reason  little  or  no  at- 
tempt  has  been  made  in  this  book  to  explain  the  nature  of 
the  various  classes  of  negotiable  instniments.  Copies  of 
the  act  are  easily  obtainable;  if  annotated,  so  much  the 
better,  and  every  student  of  banking  should  make  a  sys- 
tematic study  of  the  act  until  it  is  thoroughly  masterd. 
Concise  notes  should  be  taken  under  the  different  heads 
and  sufficient  space  left  for  comments  or  illustrations 
gathered  from  actual  experience  or  from  legal  decisions. 
The  following  rough  classification  will  give  an  idea  of 
the  scope  of  act  and  at  the  same  time  form  a  basis  for 
stiuh' : 

Sections     l-ie     Interpretation  and  general  provisions 

of  the  act. 
J 7-704  Bills  of  CiVclinnge. 
17-.1*     Form  of  bill  and  interpretation. 
85-39     Acceptance  and  interpretation. 
40-41     Delivery  and  oral  evidence. 

'See  Volume  XII,  "Commercial  Law." 


MISCELLANEOUS 


413 


42-46     Computation    of    time,    non-juridical 
days  and  days  of  grace. 

47-52     Capacity  and  authority  of  parties. 

53-59     Consideration. 

60-74     Negotiation  of  bills. 

75-84     Presentment  for  acceptance. 

85-94     Presentment  for  payment. 

95-126  Dishonor  and  protest. 
127-138  Liabilities  of  parties. 
139-146  Discharge  of  bill. 
147-164  Miscellaneous. 
lO/i-175  Chech's  (Crossed  checks). 
176-187  Promissory  notes. 
Schedule. 

The  Bills  of  Exchange  Act,  like  the  Bank  Act,  is  a 
Dominion  "tatute  and  is  based  largely  on,  and  follows 
almost  woi  a  for  word,  the  English  Bills  of  Exchange 
Act.^ 

'  ("opics  of  the  Bill  of  Exchange  can  be  obtained  by  forwarding  twenty  cents  to 
the  King's  Printer,  Ottawa. 


m 


li 


\i 
Ir 

\l 


\'^»i^^- 


PART  III:    FOREIGN  EXCHANGE 


CHAPTER   I 

MECHANISM    OF  THE   EXCHANGE   MARKET 

•>()'.).  Inland  exchange.— ¥.xchange  ma/  be  defined 
as  the  payment  of  obligations  in  one  place  by  the  trans- 
fer of  a  credit  from  another.  Its  operations  are  based 
on  the  principle  of  the  cancellation  of  indebtedness, 
thus  discharging  obligations  without  the  actual  forward- 

iiiff  of  money. 

Exchange  may  be  divided  into  inland  exchange  and 
foreijrii  exchange,  but  the  same  principles  cover  both; 
Ilic  latter,  however,  is  the  more  complicated.  Inland  or 
(lomestic  exchange  represents  the  transfer  of  funds  be- 
tween points  in  the  same  country,  generally  through  the 
niechum  of  bank  drafts  and  checks.  When  drafts  are 
,hawn  against  individuals  to  whom  merchandise  has 
been  sold  they  are  called  commercial  or  trade  bills.  For- 
eign exchange  represents  the  transfer  of  funds  between 
two  countries.  In  other  words,  inland  exchange  oper- 
ates as  a  clearing  house  between  diflferent  sections  of  a 
count ly,  whereas  foreign  exchange  operates  as  a  clear- 
ing house  between  nations. 

Inhuul  exchange  is  calculated  only  in  one  kind  of 
money:  no  conversion  is  necessary  and  the  difference 
between  the  amount  remitted  and  the  amount  paid  for 

415 


416 


I'OHKIGN    KXCIIANGE 


I 

hi 


a  draft  is  in  tlie  form  of  discount  or  premium  on  the 
amount.    Excliange  is  said  to  he  "in  favor  of  Toronto." 
for  instance,  and  "against  :Montreal"  when  the  neces- 
sity for  remittances  from  Montreal  to  Toronto  exceeds 
the  necessity  for  remittances  from  Toronto  to  Montreal, 
in  which  case  a  (h-aft  on  JNIontreal  coidd  l)e  iiurcliased 
at  a  discount  in  Toronto,  while  Toronto  funds  would 
he  at  a  premium  in  Montreal.     It  must  he  Ik)?-  •  in 
mind  that  this  condition  applies  to  large  operati.  .s  In;- 
tween  hanks  and  not  to  counter  transactions  for  which 
ordinary  banking  commission  is  charged,  no  matter  how 
the  actual  exchange  stands  between  the  two  points.  The 
maximum  discount  or  premium  rate  between  JSIontreal 
and  Toronto  on  large  transfers  of  funds  between  banks, 
never  exceeds  fifteen  cents  per  thousand  dollars.     Other- 
wise it  would  be  cheaper  for  a  bank  to  remit  large  Do- 
minion notes  (negotiable  only  between  chartered  banks) 
by  registered  mail,  insured. 

In  Canada  the  rate  for  inland  exchange  between  tlie 
banks,  or  charged  to  customers,  is  generally  very  much 
below  the  cost  of  shipping  the  actual  money.  This  is 
principally  due  to  the  fluid  nature  of  money  and  credit 
in  Canada,  owing  to  che  branch  banking  system.  Com- 
petition is  also  an  important  factor  in  maintaining  low 
rates  of  inland  exchange. 

A  bank,  through  its  branches  and  circulation,  is  gen- 
erally able  to  supply  the  bulk  of  its  own  domestic  ex- 
change reijuirements,  and  it  is  only  in  the  case  of  special 
transactions  of  large  amounts  that  outside  purchases  or 
sales  are  made.  Consecjuently  there  is  little  or  no  ma- 
terial available  for  the  study  of  domestic  arbitrage. 

Another  feature  which  tends  to  simplify  domestic  ex- 
change in  Canada  is  the  fact  that  the  principal  cities  are 
practically  in  a  direct  line  with  each  other  east  and  west. 


Mi:i  HAMSM  OF  THE   KXCIIANdE   MARKl'/r    417 

L'TO.  Inland  exchange  in  the  United  Statea.— In  the 
rnitcil  States,  with  its  widely  scattered  centers,  the 
i-ainifications  of  inland  exchange  are  far  more  exten- 
sive than  in  Canada,  and  the  study  of  the  course  of  ex- 
change hetween  the  large  cities  and  New  York  is  most 
interesting.  Reference  to  the  "Statistics  of  the  United 
States  18G7-1009"  (Document  570),  published  by  the 
National  :Monctary  Commission,  shows  that  in  New 
Orleans,  for  instance,  New  York  funds  are  almost  in- 
variaMy  at  a  discount,  owing,  no  doubt,  to  the  large 
shi])nients  of  cotton  from  that  section.  New  York  funds 
in  St.  Louis  are  also  more  frequently  at  a  discount  than 
at  a  i)reniium.  In  Chicago,  New  York  funds  in  .Tanu- 
ary,  May,  June  and  December  on  the  average  have  been 
at  a  premium;  the  balance  of  the  year  they  have  been 
(renerally  at  a  discount. 

In  San  Francisco,  New  York  funds  up  to  1910  were 
generally  at  a  premium.  In  1911,  however,  the  rate 
cnninienced  to  take  a  downward  tendency,  which  it  has 
maintained  on  the  average  ever  since.  The  average 
premium  for  the  period  of  1911-12  was  only  one  third  of 
the  average  premium  for  1909-11.  The  reasons  for  this 
change  may  be  due  to  the  fact  that  the  Pacific  Coast  is 
getting  more  and  more  self-centered,  and  conse(iuently 
less  dependent  on  the  East  for  financial  and  other  assist- 
ance. This  feature  will  probably  become  more  empha- 
sized with  the  opening  of  the  Panama  Canal  and 
the  holding  of  the  exhibition  at  San  Francisco.  The 
combination  will  forn-  an  exploitation  of  the  Pa- 
cific Coast  interests  \Much  will  be  far  reaching  in  its 
effects. 

At  the  end  of  November,  1913,  New  York  exchange 
hi  the  various  centers  was  quoted  as  follows  per  thou- 
sand dollars: 

C-VIII— 27 


a  > 


i 


418  lOHEIGN    KXClIANXii: 

Boston  par. 

Chicago   5  cents  premium. 

(express  rate  ,)()  cents  per  thousand) 
St.  I.ouis l.'i  cents  (hscount. 

(express  rate  (50  cents  per  thousand) 

St.  Pail! 15  cents  premium. 

San  Francisco l()  cents  premium. 

(express  rate  $l.i)()  per  thousand) 

271.  Netc  York  fiuuh.— The  vohuiie  of  business 
transacted  between  Canada  and  New  York  is  verv 
large,  and  tliere  is  consequently  an  active  market 
throughout  Canada  in  New  ^'ork  funds.  Nearly 
every  large  bank  has  found  it  necessary  to  establish  an 
agency  in  New  York  and  in  some  of  the  other  large 
centers  in  the  I  "nited  States. 

Until  1912  New  York  funds  in  Canada  were  gener- 
ally at  a  discount,  averaging  between  A  and  A  of  1  per 
cent,  and  this  in  face  of  the  fact  that  the  so-called  "bal- 
ance of  trade"  was  always  against  Canada.  In  other 
words,  imports  from  the  I ^nited  States  greatly  exceeded 
Canadian  exi)orts  to  the  United  States  by  some  $250.- 
000,000  a  year,  and  yet  the  exchange  was  generally  in 
favor  of  Canada.^  This  abnormal  condition  was  due 
principally  to  the  steady  flow  of  British  and  foreign  capi- 
tal into  Canada  during  the  period  referred  to,  the  rela- 
tive exchange  operations  l)eing  effected  through  New 
York.  With  the  diminution  of  the  volume  of  these  in- 
\estmcnts  and  the  constantly  increasing  remittances  to 

,                 .                                         Canadian  Canadian 

Year  CTiiIinfj  Imports  from  Kxports  to  Excess  of 

Junf  •'"•  I'nifed  States  United  States  Imports 

1908 «il,218,00O  113,5«0.000  107,698.000 

9 191..i80,000  »2,60.1.000  98.977.000 

1" '?;?7.fi93.0(.K)  113.14.5.000  104,.')IS,000 

11 29.'{,40i.0«)O  1 19,«03,000  174,197,000 

K .1<U..l;J7.000  140,.554,000  243,804.000 

13 453,81  J.OOO  1«7,100.000  «86,704,000 


MIX  IIAMSM  OF  THE   EXCHANGK   MAUKirr   419 

Kiiiopc  on  account  of  dividends,  interest,  etc.,  the  posi- 
tjon  is  <,na(liially  reversing;  since  1912  tlie  tendency 
„t'  tilt"  exciiange  market  for  New  York  funds  has 
Imii  more  or  less  against  Canada,  and  the  aver- 
;,Mc  now  would  prohably  work  out  at  par  or  a  slight 

])iriiiiiiiii. 

riic  rate  of  exchange  is  quoted  in  64ths  of  1  per  cent, 
piriuiiiin  or  discount,  as  the  case  may  be.  The  use  of 
tins  iiwkward  rate  shoidd  be  changed.  15,  30,  45,  60 
and  T.)  cents  per  thousand  would  be  much  more  prac- 
ticalile. 

As  a  shipment  of  gold  can  be  made  between  New 
York  and  Montreal  or  Toronto  at  the  rate  of  70  cents 
per  thousand  (05  cents  express  and  5  cents  cooperage 
and  cartage),  a  bank  would  as  a  nde  bring  up  gold  to 
CaiKuhi  as  soon  as  a  rate  of  ^^  to  A  discount  is  quoted, 
„r  would  ship  to  New  York  before  A  premium  is 
readied.  As  a  nde,  however,  the  ordinary  business  be- 
tucen  Canada  and  the  United  States  can  be  conducted 
without  recourse  to  gold  shipments  either  way.  It  is 
only  when  a  large  volume  of  bills  or  other  securities  are 
disposed  of  through  New  York  that  gold  shipments  to 
Caiiada  become  necessar^^  Ititernational  shipments  of 
(•DJd  are  disturbing  influences  in  any  market,  and  are 
av()i(!((l  as  much  as  possible. 

The  study  of  the  course  of  exchange  between  Mon- 
tival  and  New  York  will  show  that  the  most  violent 
tiiictuations  take  place  at  the  end  of  each  month,  the 
lowest  point  being  reached  generally  on  the  last  day 
hilt  one,  when  every  bank  is  desirous  of  converting  any 
sill  plus  balance  it  may  have  accumulated  in  New  York 
into  Canadian  funds.  This  naturally  tends  to  depress 
the  rate  on  that  date,  but  a  rapid  recovery  is  generally 
made  within  the  next  day  or  two. 


I! 


, 


4H) 


rOUKKJN    i:X('IIAN(JK 


•  i: 


II 


i  i 

i 

I'- 


For  instance,  during  the  week  ending  X()venil)cr  20 
li)13,  there  was  ahsohitely  no  market  in  Canada  for  Nev 
York  funds  at  any  price,  and  thirteen  or  fourteen  mil 
Hon  doUars  in  gold  were  imported  into  Canmhi  (Uiririj 
that  week.  On  Deeemher  2,  New  ^'ork  funds  wer 
(juoted  at  i)ar  in  Montreal  and  Toronto. 

As  New  York  is  the  financial  center  of  the  continen 
all  foreign  exchange  rates  throughout  Canada  are  l)ase( 
on  Xew  York  quotations,  Canada  having  practically  n 
exchange  market  of  its  own.  The  Xew  York  market  i 
hroad  and  strong,  and  can  he  relied  upon,  under  ordi 
nary  circumstances,  to  absorb  an  unlimited  amount  o 
exchange.  It  must  be  rememlwred,  however,  that  Ca 
nadian  quotations  will  differ  from  the  original  quota 
tions  in  Xew  York  to  the  extent  of  the  discount  o 
premium  on  Xew  York  funds.  If  Xew  York  fund 
are  at  i)ar  in  Montreal  and  Toronto,  the  quotation  fo 
exchange  will  be  i)ractically  the  same  in  both  countrie; 
as  the  transfer  of  funds  between  Canada  and  Xew  Yorl 
theoretically  necessary  to  carry  out  the  transaction,  ca 
be  made  without  gain  or  loss.  If  X'^ew  York  fund: 
however,  are  at  a  discount  or  premium,  the  quotation 
are  shaded  accordingly.  In  sterling  computations  k 
$15,  $23  and  $31  per  £10,000  are  generally  taken  a 
representing  «V,  V2,  bV,  and  A  respectively,  and  d( 
ducted  from  or  added  to  the  Xew  York  quo+at.on: 
For  instance,  if  the  Xew  York  rate  for  demand  bills  i 
quoted  at  4.8025  and  Xew  York  funds  in  :Montreal  ai 
at  ,;\  discount,  the  Canadian  equivalent  will  be  $4,862 
—  .0023  =  4.8G02  per  £.  The  same  deduction  or  a 
lowance  should  be  made  on  all  other  exchange  quott 
tior;«-  In  the  case  of  franc  quotations,  the  conditior 
are  reversed.  If  X'^ew  York  funds  are  at  a  premiun 
the  franc  quotation  is  decreased,  and  if  funds  are  at 


Mi:(  MANISM  OF   THE   EXCHANGK   MAUKKT   421 

(liscmiiit  lljf  <iin)tatioii  should  he.  increased.    The  reason 
lor  this  is  given  in  Chapter  VIII,  paragraph  351. 

2T2.  Foreign  exchange. — The  system  by  which  one 
fomitry  discliarges  its  debt  to  another  country  is  called 
tuiLi^ii  exchange.  This  indebtedness  may  arise  from 
sliii)mtnts  of  merchandise,  from  money  loaned  or  in- 
vested abroad  or  from  interest  on  such  funds,  from 
payments  by  one  country  to  another  for  freights  and 
iiisuiaiice  or  the  expenditure  of  its  citizens  traveling 
abroad.  Sometimes  the  balance  of  trade,  as  it  is  called, 
is  with  one  country,  sometimes  with  the  other,  and  ex- 
clianj'e  rates  will  rise  and  fall  accordingly.  There  are, 
of  coinse,  many  other  reasons  which  affect  the  ex- 
(han<ies.  but  the  above  are  the  principal  factors  in  the 
tiiutiiations.  The  rate  of  exchange  is  best  defined  as  the 
piiee  of  the  money  of  one  country  reckoned  in  the 
money  of  any  other  country.  In  speaking  of  the  rate 
of  exehange  between  Great  Britain  and  the  United 
States,  for  instance,  the  quotation  4.8650  means  that 
in  New  York  a  draft  drawn  on  London  can  be 
bought  at  the  rate  of  $4.86i  for  each  pound  sterling 
in  it. 

The  foreign  exchange  rates  throughout  Canada  and 
the  Ignited  States  are  governed  by  the  rates  prevailing 
in  the  New  York  exchange  market.  Cot^sequently, 
unless  the  fact  is  specially  noted,  the  whole  question  of 
exehange  dealt  with  in  these  chapters  will  be  considered 
from  tiie  basic  point,  New  York.  As  pointed  out  in  Sec- 
tion 271,  Canadian  rates  will  differ  from  New  York  ac- 
eonhng  to  the  premium  or  discount  obtaining  in  Mon- 
treal or  Toronto  for  New  York  funds.  The  Canadian 
nitthod  of  quoting  sterling  notes  as  a  premium  on  the 
old  i)ar  of  exchange  is  fully  explained  in  the  appendix, 
and  need  not  be  considered  in  these  chapters;  the  prac- 


42€ 


FOUKKJN    KXCHANGE 


u 


-i- 

Ti 


ft 


tioc  is  gradually  droppin^r  i„io  ,|i.siisc.  and  it  is  to  I 
hoped  that  it  will  soon  he  discontiimcd  entirely. 

Foreign  exchange  differs  from  iidand  exchange 
two  important  re.si)e(t.s;  in  the  first  place,  it  involves tl 
conversion  of  the  money  from  one  conntry  into  its  er  ji 
alent  in  the  money  of  another  conntry,  and  in  the  se 
ond  place,  interest  hecomes  an  imiKJrtant  factor  in  tl 
transaction. 

One  of  the  most  essential  features  of  a  training  I 
foreign  exchange  is  a  thorough  knowledge  of  values  an 
methods  of  conversion  of  the  currency  of  different  cour 
tries.  All  calculations  hy  a  Iwginner  should  he  mad 
independent  of  exchange  tables.  In  many  offices  tli 
first  calculation  is  made  by  one  clerk,  and  is  checke 
by  a  second  clerk  with  the  tables.  The  training  tin 
obtained  and  the  facility  and  rapidity  with  which  sue 
calculations  can  be  made,  form  the  groundwork  of 
technical  education  in  foreign  exchange,  which  is  l)econi 
ing  more  valuable  every  day  as  international  transactio 
increases.  In  this  coimection  there  are  three  things  t 
be  carefully  studied.  When  mastered,  foreign  exchang 
will  be  found  robbed  of  all  its  ai)parent  intricacy: 

1.  Mint  par. 

2.  Gold  or  specie  points. 

3.  Conversions  and  fluctuations. 

273.  The  mint  /wr.— The  mint  par  between  any  tw( 
countries  which  use  the  same  metal  for  their  standan 
coinage  is  found  by  comparing  the  standard  coin  of  eadi 
and  basing  the  calculation  on  the  weight  of  the  puri 
metal  in  each  coin.  The  mint  par  between  two  countrie 
never  varies  unless  one  r)f  them  alters  its  coinage  rcgii 
lations,  increasing  or  decreasing  the  quantity  of  pun 
metal  in  its  standard  coin. 


Mr.(  IIANISM  OF  THE  KXCHANT.E   MARKET   4«3 

Hrlwtrn  a  gold  stainlard  ooiinlry  and  a  silver  slaiid- 
anl  (omitiy  tliere  can  exist  no  fixed  par  of  exchanjfe, 
for  the  reason  that  the  vahie  of  silver  in  relation  to  gold 
is  suhjeet  to  great  fluctuations. 

Piaetieally  all  the  leading  countries  of  the  world  are 
WW  on  a  gold  basis,  China  and  a  few  of  the  unimpor- 
tant South  American  repid)lics  alone  being  on  a  silver 
liasis  entirely.  France  and  the  other  countries  in  the 
Latin  Tnion  are  thecretieally  bimetallic  (pledged  to  the 
niiliiiiited  coinage  ot  both  silver  and  gold  coins),  but 
practically  they  are  to  all  intents  and  purposes  on  a  gold 
basis. 

All  coins  whether  of  gold  or  silver  are  made  of  so 
nitich  pure  metal  and  so  much  alloy,  the  latter  being 
used  to  harden  the  coins;  the  term  "fineness"  expresses 
the  amount  of  pure  gold  or  silver  contained  in  a  thou- 
sand parts  of  the  combination. 

The  British  sovereign  is  ^y^'^  fine,  or  \\  fine  and  iV 
alloy;  Turkey  and  Brazil  are  also  \l  fine  in  th(  r  gold 
coins.  All  other  countries  are  on  a  basis  of  i^oVff  fine, 
or  Jo  fine  and  t^jt  alloy. 

The  table  on  page  426  shows  the  principal  countries, 
the  name  of  their  standard  coin  and  its  gross  weight 
grain  troy,  the  number  of  grains  of  pure  gold  and  its 
e(|uivalent  in  dollar  currency.  The  reader  is  advised  to 
work  out  the  equivalents  himself.  The  operation  is  sim- 
j)lc  arithmetic:  divide  the  amount  of  pure  gold  in  one 
unit  into  the  amount  of  pure  gold  in  the  other.  For 
instance,  compare  the  sovereign  and  the  gold  dollar: 

Gross  weight  of  sovereign.  .123.2744'r  grs. 
less  A  alloy 10.272H7 


Pure  gold  in  sovereign 11 8.001 60  grs. 


4U 


1   ( 


t'-f 
M 


in 


1 


Li   ; 


A- 
1 


k 
n  ■ 


lit* 

I  i 


roUHKA    i:X(  IIAN(JK 


(iross  wc'i^hl  •»)'  doHn 
less   I'o   alJoy 


25.H  grs. 
2.5H 


Pure  ^(>I<1  ill  (lolliir 

therefore 
1  dollar 
1  pound 


28.22  ^rs. 


•.•:iJ'.'X2i)yiL' 
M3(j«no 

23i!2"     ~^ 


4*  — i..'n»</ 


similarly  a  Iraiie  contains  4.t8()3(}  grs.  of  pure  «ol(i 
1  dollar    -    . -'-^,    —  fes  .).18''() 
1  frane 


4  iMiau 

^  S  =  .10205  eents 


The  British  sovereign  is  legal  tender  in  Great  Brit 
ain  and  all  the  British  colonies  (including  Canada) 
and  is  current  practically  all  the  world  over. 

The  Tnited  States  gold  dollar  is  legal  in  Canada 
Alaska,  Hawaii,  I»anania,  Porto  Rico  and  Philippines 

The  Scandinavian  Tnion  consists  of  Denmark.  Xor 
Avay  and  Sweden :  the  nomenclature  and  value  of  thei 
coins  are  identical. 

The  Latin  Union  consists  primarily  of: 

France  (franc,  100  centimes). 
Belgium  (franc,  100  centimes). 
Switzerland  (franc,  100  centimes). 
Greece  {drachma,  WO  lepta). 
Italy  {lira,  100  cent  mini) . 

Although  not  members  of  the  Union,  the  following 
have  adopted  the  monetary  system,  so  that  practically 
all  the  south  of  Kuroj)e  arc  on  the  same  basis: 

Roumaiiia  (Ivic,  100  J)an'i). 
Bulgaria  {Inc.  WO  .slotinLi). 
Spain   {ju'sHa,  100  vcntcahws). 
Servia  {(Vinar,  100  paras). 


>  M 


rFu 


-r  o  a  h.  ao 


f.2  gi  kJ  OS  S  t-»5  *  >3  o5.HS:»55^ 


4^ 


iiG 


FOREIGN    EXCHANGE 


i 


Country 


AiiNlria-lliiii^rury 

I^iliii  I'liidii.. 

<'••»  n  iiilii  ami    I  nilid 

States 

l>**ninurk 

(lermany. 

Holland 

Japan 

Mfxifo 

Ru.s.sia 

Great  Britain 


Namf  of 
I  nit 


krone 
franc 

•lollar 

krone 

ri'ichsmark 

gulden 

yen 

pe.io 

ruble 

pound 


(iross 
^yl•iKht 
Cii  rains 


5  «77« 
4  »7«17 

C. 91415 

0.145K8 

lo.;no54 

H.  80024 

1«.8C(«;{ 

13.)J7JS4 

123.27447 


Pure 

Gold 

Grains  of 


4.70498 
4.4803(i 

23.22 

0  22274 

5.5   ,34 

9.33348 

11.57422, 

11.37421 

1 1   94820 

113.00100 


Dollar 

Kquiva- 

lent 


.20202 
. 19295 


.20799 
.23821 
.40195 
.49845 
.49845 
.51456 
4.86056 
or  4.80% 


SterJinf 
Kquivg. 

lent 
'npenr<« 

1U<1 
»  516 

49,816 
13  2U 
11  75 
19  8« 
24  57 
24  57 
25.37 


The  table  on  page  427  gives  an  interesting  comparison 
of  the  units  a  the  principal  countries  in  terms  of  each 
other  s  units,  based  on  mint  par  values 

274.  Gold  points.-Go\A  points  or  specie  points,  as 
they  are  sometimes  called,  are  the  rates  of  exchange  pro- 
duced  by  buj.ng  gold  in  one  country  and  selling  i^  in 
another.  When  sterling  exchange  is  selling  in  New 
\  ork  higher  than  it  would  cost  to  buy  gold  and  ship  it  to 
London  the  remitter  naturally  takes  the  cheaper  method 
and  sends  gohl;  and  Mhen,  on  the  other  hand,  exchange 
IS  so  freelj'  offered  in  New  York  that  the  rate  registers 
abnormally  low,  a  seller  may  find  it  cheaper  to  brina 
Ins  J^ondon  balance  over  in  gold. 

This  mint  par,  or  theoretical  par,  remains  invariable 
m  gold  standard  countries.  If  the  exporting  or  import- 
■ng  of  g„ld  could  be  effected  without  expense  or  loss  of 
interest,  the  mint  par  and  gold  points  between  anv  two 
countries  would  be  practically  identical,  but  heavV  ex- 
penses are  involved  in  a  gold  shipment,  for  freight,  in- 
surance, cooperage,  cartage,  abrasion,  interest  and  other 
charges.    These  deducted  from  the  mint  par  will  give 


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^^^  FOHKIGX    KXCHANGK 

the  import  gold  point  and  added  t.»  the  nunt  par  will 
give  the  export  gohl  point. 

The  charges  on  a  shipment  of  gold  to  London  „r 
I  ar.s  vary  w.th  each  shipper,  an<l  these  are  tra.le  secrets 
M^hich  are  jealously  gnar.led.     It  is.  therefore,  inmossi- 
hie   o  g,ve  any  exact  figure,  hnt,  roughly  speaking,  the 
gold  pomts  for  sterling  are  ^  to  -^  per  cent  on  either 
side  of  the  m.nt  par,  or  two  c-ents  to  two  and  a  half  cents 
per  pound  sterling  (see  Sections  343  and  344).    Some 
times  special  concessions  are  offered  hv  the  receiver  of  the 
gold,  which  materially  reduce  the  exi)ense  of  the  shi„- 
nient     Speaking  hroadly,  the  fluctuations  in  exchange 
may  he  ld<ened  to  the  variations  in  the  jmriner's  com- 
pass, with  the  mint  i)ar  rei)resente(l  hv  the  true  north 
from  which  the  needle  ^•aries  from  east  to  west,  within 
certain  limits,  responding  to  accidental,  diurnal  and  sec- 
ular changes      So  in  exchange,  we  find  the  quotations 
fluctuatmg  first  on  one  side  and  then  on  the  other  ,)f 
mint  par,  never  falling  helow  the  gold  imi)orting  point 
or  rising  ahove  the  gold  exporting  point,  and  withal,  so 
delicately  halanced,  that  its  movements  are  afl'ected  hv 
the  least  change  in  international  or  internal  condition^ 
Roughly  sjjeaking,  the  extreme  gold  points  hetween 
iVew  York  and  London  range  from  $4.83  to  .1^4.90 

New  York  and  Paris from    5.23  to    ,5.16     fcs. 

"         "       "    Berlin from  94..50  '•  96.2.5     inks. 

London  and  Paris from  2.5.34  "  25.V21  fes. 

I'         "     ^"^ew  York....  from  .$4.90  "  .$4.83 

^^^''''" from  20..53  "  20.32     niks. 

Amsterdam... from  12.17  "  12.02     florins 
275.  //ore  cvcluuific  is  ,juofaI.     The  three  principal 
rates  of  exchange  are  those  lor  sight  drafts  drawn  ..„ 
London,  Paris  and  Berlin. 

Drafts  on  London  are  quoted  at  so-and-so-much  per 


Mi;(  IIAMSM  OF  Till-:  KXCIIANGE  MARKET    4^29 


|)iiiiii(l  sterling,  the  fluctuations  i)ropfressin^  by  five  one- 
ImiikIikIiIis  of  a  cent  per  pound — for  example,  $4.86, 
st.sr.O.),  .$4.8(510.  The  old  method  of  quoting  sterling 
<ln,rts  by  eighths  ($4.80,  $4.80l/s,  $4.8«14)  still  obtains 
to  soiiie  extent,  hut  is  being  rapidly  discarded  in  favor 
(if  the  closer  and  more  reasonable  system  of  decimals. 

Dral'ts  on  Berlin  are  quoted  at  so-and-so-many  Amer- 
ican (tilts  for  each  four  marks.  Thus  a  price  of  951/^, 
(|ii(»li(l  to  a  man  who  wants  to  buy  a  draft  drawn  in 
marks  on  Berlin,  means  that  for  every  four  marks  he 
wants  he  nnist  pay  $.9.>l/s.  Progression  in  the  case  of 
tills  (|ii()tation  is  by  sixteenths— 9.>,  9.5  1/16,  951/8,  for 
(\anij)le.  In  order  to  bring  these  quotations  closer 
tlurt-  may  be  added  or  subtracted  slight  percentages,  as, 
tor  instance,  9.3 l/s  +  1/16%,  or  9o\\  -  l/lQ'/r.  In 
turning  marks  into  dollars  at  one  of  these  rates,  it  is  to 
hf  noted  that  the  percentage  mentioned  is  to  be  added 
or  snbtraeted  from  the  dollar-proceeds  after  conversion 
at  the  regular  rate  has  been  made;  thus  in  figuring,  say, 
I.OOO  marks  at  95y^  +  1/16,  first  convert  the  1,000 
marks  at  9.5l^,  adding  to  this  dollar-product  one-six- 
t((.iith  of  one  per  cnt.  of  itself. 

The  quotation  of  marks  at  so-and-so-many  cents  for 
oicli  mark  rather  than  at  so-and-so-many  cents  for  each 
toKf  marks  would  seem  to  be  far  more  reasonable,  but 
tile  custom  has  come  down  from  times  immemorial  and 
allows  no  sign  of  changing. 

Drafts  on  Paris,  unlike  d'-afts  on  Berlin  or  London, 
arc  (juoted  at  so-and-so-much  of  the  foreign  currency 
tor  each  American  dollar.  Thus  a  quotation  of  5.lii% 
iiKaris  that  5.18%  francs  can  be  bought  for  one  dollar. 
A  moment's  thought  will  show  that  the  higher  the  fig- 
ures in  the  rate,  the  lower  the  rate  actually  is.  Drafts 
-n  Paris  are  cheaper,  for  instance,  when  5.1834  francs 


430 


FOREIGN    EXCHANGE 


can  be  bonght  for  a  dollar  tba„  wlien  only  5.181/,  franc 
can  be  bought.    Progression  is  by  five-eighths  of  a  eeT 
time  (a  centime  is  a  hundredth  of  a  franc)  per  dolZi 
thus  5.18%    U8.y„  .,.19%,  etc.     As  ..iikZ^^Z- 
tafons  arc  brought  closer  together  by  the  use  o    p '. 
centages.    Thus  a  seller  of  drafts  on  Paris  wanting  to 
charge  a  customer  a  little  more  than,  say,  5.18l//bu? 
not  wanting  to  charge  as  much  as  the  nexfreg^dato  o 
tation   (.5.171/1.)   might  fix  a  price  of  5.181^-7/ 
Tha    would  mean  that  for  each  .5.181/,  francs  in  the 
draft,  one  do  lar  would  be  charged;  in  addition  to  "h  ch 
there  would  be  a  charge  of  1/16  of  one  per  cent. 

2,0.  Lnderhiing  principles.-Vnderlylng  the  whole 
business  of  foreign  exchange  is  the  system  by  which  h 
creditor  draws  a  draft  upon  the  debtor-bv  which    or 

sold  100  bales  of  cot  on  to  a  spinner  in  Liverpool,  draws 
a  draft  upon  the  Liverpool  firm  for  £1,000.  That  is 
the  origin  of  practically  all  foreign  exchange  business- 
some  one  IS  owed  money  and  in  order  to  get  it  draws 
upon  the  man  who  owes  it  to  him.  The  draft  he  draws 
IS  called  a  bill  of  exchange. 

How  this  simple  operation  develops  into  a  transaction 
in  foreign  exchange  is  best  shown  by  using  a  concrete 
example.  Take  the  case  of  the  cotto/merclfai^  who  h 
sold  his  100  bales  and  drawn  his  draft  for  £1,000  on 
Liverpool.  Such  a  draft,  in  pounds  sterling,  is  in  itself 
of  no  use  to  him.  Before  he  can  make  use  5  it  he  must 
manage  to  convert  it  into  American  money-find  sonie- 

Tntrf  '"'  '*  '1  ^'^'^  ^""  ^^^'^^  ^'-  ^*-     Such  a 
man  IS  the  foreign  exchange  banker.     He  keeps  an  ac- 

r"co«o^"'"^  '  "f  "  ^^"'"^^  *°  ^"^  '^'  ^»r«ft  from 
the  cotton  man  m  order  to  send  it  over  there  and  have 


MKCIIANISM  01'  TIN-:   i;\(  II.\N(;i.:  MAKKKT       4:51 

it  placed  to  the  credit  of  his  account.  Hie  price  of  a 
IM)und  sterhng  to-day  is  $4..8(i,"  he  says.  "J  can  pay 
yon  $4,8(50  for  your  draft  on  Liverpool  for  ^1,000.'' 
The  cotton  merchant  accepts,  takes  his  check,  and  is  out 
of  it.  lie  lias  sold  his  cotton,  .rot  his  money,  and  is 
midy  for  a  new  transaction. 

Ihit  why  was  the  hanker  willin^r  to  buy  that  draft 

for  11.000,  and  why  does  he  keep  an  account  in  pounds 

stdlin/r  over  in  Liverpool?     Simply  because  customers 

uli.)  have  i)aynients  of  one  kind  or  another  to  make  on 

tJR  other  side  are  continually  comin^r  to  him  to  buy 

(halls  in  pounds,  and  he  wants  to  be  in  a  position  to 

sell  them  what  they  want.     When  he  takes  that  £1,000 

(halt  off  the  hands  of  the  cotton  merchant  and  sends 

it  over  to  be  deposited  to  his  credit  in  Liverpool,  he 

ktioNvs  very  well  that  he  can  always  draw  his  own  draft 

for  £1,000  and  sell  it  for  dollars  at  whatever  happens 

to  k'  the  current  rate  of  exchange.     If  he  paid  $4,800 

for  the    £1,000  draft  he   Imught,  and   sells   his  own 

11,000  draft  for,  say,  $4,870,  he  has  clearly  made  $10 

on  the  transaction.     And  that  is  what  the  foreign  ex- 

ehan^re  banker  is  in  business  for— to  buy  drafts,  deposit 

them  abroad  for  his  credit,  and  tlien  sefl  liis  own  drafts 

a^rainst  the  balance  at  a  higher  rate  of  exchange. 

Needless  to  say,  the  illustration  given  is  elementar>'; 
hankers  do  not  make  money  exactly  as  stated— the  oper- 
ation described  is  the  very  simplest  and  would  not  result 
in  hankers  making  much  money.  At  the  same  time  it 
IS  the  principle  underlying  the  whole  business,  the  prin- 
ciple on  which  a  clear  understanding  of  th.  foreign  ex- 
chai.^re  business  as  it  is  carried  on  absolutely  depemls. 
Everything  is  built  up  around  it.  Every  move  the  for- 
ei^'n  exchange  banker  makes  depends  upon  his  being 


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432 


MKCIIAMSM  OF  TllK  KXCIIANCii:  MAUKIIT      4.*j:{ 


;il»lo  lo  buy  bills  drawn  by  creditors  on  debtors,  and  on 
liis  bein^'  able  readily  to  sell  bills  drawn  against  balances 
lie  is  carrying  aliroad. 

It  is  customary  for  bankers  vvbo  are  doing  a  regular 
l(.rii<,'ii  excbange  business  to  carry  a  balance  with  their 
r(.r(i;,ni  correspondent  (they  often  have  several  in  each 
h\<X  city)    and  then  by  each  niail-stcanier  to  remit  a 
;;iiat  <|uantity  of  different  kinds  of  exchange,  drawing 
tiiiir  own  drafts  against  the  bills  they  are  remitting,  and 
so  keeping  the  original  balance  about  stationary.     A 
huge  house  will  fretpiently  send  over  as  much  as  .£.500,- 
()()()  worth  of  bills  in  one  mail  for  the  credit  of  its  account. 
The  descriptive  sheet  accompanying  this  mass  of  l)ills  is 
apt  to  have  recorded  on  it  alwut  every  kind  of  foreign 
exchange  in  general  use.     Following  is  a  description  of 
(iifJ'erent  kinds  of  bills  taken  from  the  remittance  sheet 
of  one  of  the  largest  drawers  of  exchange  in  the  country. 
277.  Commercial  long  bills.— Drafts  drawn  at  from 
thiity  (lays'  to  six  months'  sight  upon  foreign  buyers  of 
im ichandise  or  upon  banks  abroad  designated  by  them. 
Kxchange  of  this  kind  is  usually  accompanied  by  bill  of 
lading  (receipt  from  the  railroad  or  steamship  line  show- 
ing that  the  merchandise  has  been  shipped),  invoice  of 
the  g(M)ds,  and  often  by  insurance  certificate  showing 
where  and  for  how  much  they  have  been  insured. 

Drafts  of  this  kind  drawn  against  shipments  of  cot- 
ton, corn  and  wheat,  make  up  the  bulk  of  the  commercial 
ioriign  exchange  handled  in  the  New  York  exchange 
market.  Where  the  drafts  are  drawn  on  a  very  good 
lionse  abroad  or  on  a  bank,  the  bill  of  lading  is  deliver- 
al)lf  upon  "acceptance"  of  the  draft  by  the  parties  on 
"  hom  it  is  drawn.  Where  the  drawee's  standing  is  less 
»vi  II  known  or  where  the  merchandise  is  iK'rishable,  docu- 
iiKiits  are  <leliverable  otdy  on  actual  payment  of  the 
c—vin— .>H 


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Ml  (  IIAMSM  OK    rilK  KX(  IFAMJE  MAUKKT       4:U 

111  alt  uiidtr  discount.     In  the  cusc  of  a  driift  marked 
rddciiiiK'nts  for  aceeptanee,"  therefore,  the  party  abroad 
Ivliicli  lias  iKMight  the  ^«M)ds  can  ^et  them  out  of  the  ship 
»s  s(M)ij  as  it — or  the  bank  which  represents  it — has  **ac- 
rt  ptid"  the  draft.     Where  the  bill  of  huling  is  deliver- 
Inhli  oidy  on  "payment"  tiie  consi^rnee  has  to  pay  the 
Idralt   diss  a  rebate  for  the  unexpired  time  it  has  to 
Iriiri)  before  be  can  get  bobl  of  the  bill  of  lading  to  get 
Itlic  ^r,„„ls  (iff  the  ship.  "Acceptance  bills"  are,  therefore, 
hliscoiiiitahlr;  "payment"  bills,  rebatable  at  the  current 
Irate  for  loans.     The  rate  for  short  loans  in  London 
|iisiially  riding  lower  than  the  discount  rate,  bills  for 
jpayiiitnt  drawn  against  perishable  goods  which  mu«t  be 
paid  Milder  rebate  as  soon  as  the  goods  arrive,  command 
a  better  rate  of  exchange  than  even  the  l)est  bills  where 
(loeiiments  are  to  lye  handed  over  to  the  consignee  on 
aeeeptanee.     Differently  expressed,  the  idea  is  that  a 
lii/;Iier  rate  of  exchange  is  commanded  by  a  grain. "pay- 
nient"  bill  than  by  a  cotton  "acceptance"  bill,  because  in 
the  discounting  process  in  London  less  pounds  sterling 
'  will  be  taken  off  the  face  of  the  grain  bill  than  off  the 
[cotton  bill. 

Documentary  exchange  drawn  by  reliable  parties  is 
I  a  fairly  safe  kind  of  exchange  in  which  to  deal,  the  buyer 
kiiiy:  pi-otected  by  the  bill  of  lading  which  is  endorsed 
ov(  r  to  him.  As  long  as  the  buyer  of  the  exchange  or 
liis  a^reiit  abroad  retain  the  bill  of  lading,  they  are  per- 
fettly  safe;  it  is  in  the  case  of  acceptance  bills,  therefore, 
where  the  documents  pass  out  of  possession  as  soon  as 
the  drawee  accepts  tlie  draft,  that  the  element  of  risk 
comes  in.  For  which  reason  the  greatest  care  is  exer- 
cised not  only  as  to  the  maker  of  the  bill,  but  as  to  the 
drawee  as  well,  documents  never  being  surrendered  to 
the  latter  iiidess  bis  standing  is  absolutely  satisfactory. 


4.'tU 


FOIIKIC.N   i:X(  IIANC.R 


27H.  Jiilh  of  cvchan^c  thai  inv(tlvc  more  or  less  rink.- 
C'oiictriiiii^  tilt"  risk  incurred  in  the  ptireliusc  of  djici 
iiKiitary  exelmn^a-.  A,  \V.  Mur^nitt'  in  his  book  "lutci 
lintionul  Exehun^e"  writes  us  follows: 

JiilU  of  cxihaufiC  that  ma//  he  purchttncd  aafehj.—BW 
a<T«»iiipaiii(>«l  l)v  (lonimints  cnvirin^  ht/ipli-,  nnn-|M'risliu}) 
imrdmndisc  tlial  niii  lu  rnulilv  ivmiM  in  tlic  niarkit  wIuti-  nii 
HiKiiwI,  in  the  event  of  foreeW  sale,  l»y  reason  nf  iion-Heecptaiu 
«r  non-pavment  hy  the  <lrawees  of  the  appertaining  liill,  and  tl 
inaliiiity  of  (Irawern  to  reinihurse  the  purchaser  of  tijc  bill  iipo 
ileniaml  for  the  amount  originally  paid  tlanj,  plus  expenses. 
The  proeeedn  realized  upon  nierehandiHe  disposed  of  undf 
forced  sale  w«)uld  Ih'  ap|)lied  on  iiceount  of  the  amount  of  reini 
hursement  demanded  of  drawers,  and  provided  the  nierclmndi* 
was  of  the  nature  just  referred  to,  would  almost  liquidate  th 
jnirehaser's  elaim  against  the  drawers,  and  the  small  balance 
still  due  to  the  purchaser,  may  1h«  recovereil  with  little  difficulti 
from  the  drawers.  If,  however,  they  have  failed  in  the  meantimr 
then  the  purchaser  would  have  a  creditor's  claim  for  such  bnl 
unce  against  the  insolvent  drawers. 

The  possibility  of  such  a  loss  is  very  remote  in  view  of  th( 
fact  that  the  majority  of  drawers  of  bills  of  exchange  (export 
ers)  have  all  refuse<l  bills  immediately  referred  to  their  owi 
agents  abroad  for  protection. 

Staple  and  non-perishable  merclmmlise  includes  flour  anc 
other  manufactured  cereals  such  as  corn  meal,  oat  meal,  hoin 
iny,  j'tc. ;  farming  im|)lements,  canned  meats,  fresh  meats  and 
other  provisions,  when  the  fresh  meats  and  provisions  arc 
shipped  in  refrigt>rator  cars  and  vessels  of  modern  ty|)e,  and 
warehoused  in  cold-storage  ])]ants  upon  the  arrival  at  destina- 
tion, if  not  inunediately  taken  up  by  drawees. 

liiUs  invoh'ing  marc  or  lens  risk. — Bills  accompaniefl  hy  doc- 
uments representing  shipments  of  perishable  merchandise,  such 
OS  butter,  cheese,  fresh  fruits,  etc.,  that  are  liable  to  deteriora- 
tion in  quality,  or  to  absolute  loss,  during  transit. 


\!r.(  iiAMsM  OF  Tin:  kxciiamu:  maukkt  m 


Mill-,  uitli  ilnriiiiiciil.s  NliuHiii^  coliatinil 


Mruri 


t>'  of  I 


ivf  nil- 


,li(»iM  •>  or  oflicr  livi>  iiiiiinalH.iu' 


frs«i 


itiitin|(  the  fx|)t>ii!«i>  uf  liolp 


iiid  f.i.l  iliii  iii^r  tniiisit  for  thf  iiiiiiiitcnHiicc  of  lift-,  an  a  ri-fumil 


,.l'  Ml.  Ii  iiniux««l  hill  Hoiilil  iltprtciatf  tlu-  valiu-  of  tlii'  hvv 
,1  tv  by  du.v,  to  thf  txUnt  of  such  i;x|Kn>w;  iiu-urrcd. 


urit>', 


In  ail.lition  to  the  liiihility  of  drawers  and  endorsers,  if  any, 
piirdiiiscrs  of  documentary  hills  are  secured  by  the  financial  rt- 
>|.(. nihility  of  the  acceptors  on  ami  after  acceptance  until  actual 

|i.iMiiiiif  <it'  till'  hills. 

I'll,  liability  of  drawers  continues  after  the  acceptance  of  bills, 
.111.1  n mains  in  force  during  the  whole  life  of  the  hills,  and  ceasei* 
iiiilv  iipoii  payment. 

Tip  primary  conditions  of  the  desirability  of  the  purchase  of 
.ui.v  hill  of  exchange  depend  upon  the  moral  and  financial  stand- 
in^r  of  the  parties  thereto,  and  the  liabilities  just  stated  of  the 
l.tilits  >li()uld  he  (juite  ample  in  the  majority  of  cases.  Further, 
th.M  l.ilU  possess  another  element  of  protection  against  a  possible 
I..-  in  this,  that  they  are  supplemented  by  documents  covering 
>.il.il»lf  imrchandise  with  title  continuing  in  the  purchaser  of  the 
l)ili>.  uiiMI  payment  at  maturity,  or  retirement  prior  to  maturity, 
of  tilt  respective  hills  of  exchange. 

•-'7!».  Clean  commercial  6i7/*.— Bills  drawn  by  com- 
mcnial  lioiises  in  one  countn'  on  honses  in  other  coun- 
tries, at  anywhere  from  thirty  days'  to  six  months'  sight 
and  miaoeonipanied  by  documents. 

Of  all  classes  of  exchange  this  is  about  the  most  risky 
in  wh'wh  to  deal,  for  which  reason  bills  of  this  class  can 
l)e  bad  at  lower  rates  than  almost  any  other  kind.  The 
haukn-  buying  a  bill  of  this  kind  has  absolutely  no  secur- 
ity ( xcept  the  standing  of  the  firms  concerned.  The 
actual  shipments,  payment  for  which  is  represented  by 
thi"  drafts,  may  have  l)een  made  months  before,  or  they 


MICROCOPY   RESOLUTION   TEST   CHART 

(ANSI  and  ISO  TEST  CHART  No    2) 


1.0 


I.I 


1.25 


if  1^ 


1.4 


2.5 


2.2 
2£ 

1.8 


^  APPLIED  IIVMGE     inc 

:^.  1653   tasl   Mam    Street 

5".^  Roctiestef.    New    Yo-k         14609        USA 

-^  (716)   482  -  "MP  -  Ptione 

^S  ("6)   288  -  5989  -  Fa« 


438 


FOREIGN  EXCI lAXGK 


I 
I 


1  : 


may  not  have  been  made  at  all— about  that  the  baiikei 
buying  the  bills  knows  nothing.  When  he  buys  cleai 
conmiercial  bills  he  does  so  absolutely  on  the  standing  ol 
the  drawer  and  the  drawee.  A  good  many  foreign  ex- 
change bankers  make  it  a  point  never  to  buv  this  class  of 
bill  at  all. 

280.  Drafts  drazcn  against  securities. — Out  of  inter- 
national trading  in  securities  there  originates  an  enor- 
mous volume  of  foreign  exchange  business.  A  banker 
in  Xew  York,  for  instance,  sells  a  block  of  bonds  to  a 
firm  in  London  and  draws  upon  the  firm  in  London  for 
the  purchase  price  converted  into  pounds  sterling  at  the 
prevailing  rate.  To  this  draft  are  attached  the  securi- 
ties, the  whole  being  then  sold  in  the  open  market.  Ex- 
change of  this  class  is,  of  course,  about  the  safest  to  buy 
that  there  is.  The  buyer  of  the  draft  gets  the  bonds  as 
collateral  and  does  not  give  them  up  until  the  draft  is 
paid  on  the  other  side. 

Sales  of  stocks  as  well  as  of  bonds  furnish  a  large 
amount  of  security-bills.  "Buy  for  us  100  shares  of 
Union  Pacific  preferred  and  draw  on  us  for  the  amount 
due,"  comes  a  cable  from  a  house  in  London  to  a  house 
in  Xew  York.  The  order  is  executed,  the  stock  bought, 
and  a  draft  for  the  amount  expended  drawn  upon  the 
house  abroad  which  sent  over  the  order.  Here  again 
the  stock  itself  is  attached  to  the  exchange,  insuring  for 
it  a  quick  sale  in  the  exchange  market.  A  form  of  bill 
to  the  purchase  of  which  there  attaches  less  risk  could 
hardly  be  imagined. 

281.  Bankers'  long  bills.— Drafts  drawn  at  sixty  and 
ninety  days'  sight  by  bankers  here  upon  bankers  abroad 
are  coming  to  take  an  increasingly  important  part  in 
international  exchange  operations.     Such  bills  of  ex- 


\ 


AIIXHANISM  OF  THE  EXCIIANGK  .^lAKKET      4.J!) 

clian^'e  may  be  divided  into  three  classes:  (a)  long  bills 
arising  from  the  regular  conduct  of  foreign  exchange 
business;  (b)  long  bills  originating  from  the  operation 
of  loaning  foreign  ii^oney  in  this  market;  (c)  long  bills 
sold  without  security  for  the  purpose  of  raising  money 
—so-called  "finance-bills." 

\\' ith  regard  to  the  first  class  of  bills,  it  need  only 
he  said  that  «very  banker  doing  a  regular  foreign 
exchange  business  is  continually  called  upon  to  fur- 
nish customers  with  bills  of  exchange  drawn  at  sixty 
and  ninety  days'  sight.  Take,  for  example,  the  case 
of  a  merchant  here  who  owes  a  merchant  abroad 
£1,000,  due  in  two  months,  but  who  has  the  money, 
on  hand  and  wants  to  pay  off  the  debt.  He  might 
buy  a  demand  bill  of  exchange  and  get  the  *  mer- 
chant abroad  to  give  him  a  rebate  for  the  period  of  pre- 
payment; but  a  far  better  way  would  be  to  go  to  his 
hanker,  get  from  him  a  sirty-day  bill  of  exchange  and 
send  that.  This  is  only  one  of  a  thousand  different 
sources  from  which  may  spring  a  demand  for  bankers' 
long  bills.  Any  banker  at  all  actively  engaged  in  the 
business  must  at  any  time  be  prepared  to  furnish  cus- 
tomers with  exchange  of  this  kind-. 

282.  Long  bills  from  loaning  foreign  money. — The 
second  class  of  bankers'  bills  originates  from  loaning  op- 
erations. To  appreciate  fully  the  nature  and  standing 
of  these  bills,  it  is  necessary  to  understand  the  mechanism 
of  the  loaning  of  foreign  money  in  this  market.  Take, 
for  instance,  the  case  of  a  house  in  London  which  decides 
to  lend  money  out  here.  Its  American  correspondent 
is  notified,  and  the  question  having  been  settled  as  to 
\s  hether  the  loaning  house  wants  to  take  the  risk  of  ex- 
change and  accept  a  fixed  rate  of  interest  on  the  money, 


wm 


440 


lOKKKi.N  i:xtiiAN(;i: 


or  whellR'r  the  loaning  Iionsc  would  rather  accept  a  com- 
mission and  leave  the  risk  of  exchange  to  the  borrower, 
the  operation  goes  forward  about  as  follows: 

Suppose  the  London  house  to  have  chosen  that  the 
loan  shall  ))ear,  say,  4  per  cent  interest,  the  risk  of  ex- 
change to  be  taken  by  itself,  the  lender.     The  first  step 
is  the  drawing  by  the  American  house  of  an  amount  of 
ninety-day  exchange  exactly  equivalent  to. the  amount  of 
American  currency  to  be  loaned  out.     Thus,  if  the  loan 
is  to  be  for  $100,000,  and  the  rate  realizable  for  ninety- 
day  exchange  is  48.5,  the  American  house  draws  a  draft 
on  the  lender  in  London  for  £20,G1 8.     This  draft  it  sells 
in  the  open  market,  realizing  thereon  exactly  $100,000 
which,  upon  deposit  of  satisfactory  collateral,  it  turns 
over  to  the  firm  here  to  whom  the  loan  has  been  made. 
The  latter  will  then  have  the  use  of  the  $100,000  for 
ninety  days,  at  the  end  of  which  time  it  must  pay  it  back, 
plus  4  prr  cent  interest,  to  the  American  correspondent 
of  the  English  lender. 

So  far  as  the  actual  borrower  of  the  $100,000  knows, 
the  loan  is  a  regular  loan  of  American  currency— he  has 
no  way  of  knowing  that  the  money  he  is  receiving  is  a 
product  of  bills  of  foreign  exchange,  or,  indeed,  that 
there  is  any  question  of  foreign  exchange  involved.     He 
lias  borrowed  $100,000,  and  at  the  end  of  ninety  days  he 
will  have  to  pay  it  back  with  4  per  cent  interest.     Beyond 
that  his  concern  in  the  matter  does  not  extend.     But  with 
the  two  banking  houses  who  have  lent  the  money  the  case 
is  different.     With  them  it  is  very  much  of  a  question  of 
foreign  exchange  rates.     They  began  the  operation  bv 
selhng  £20,018  of  ninety-day  sight  bills,  and  at  the  end 
of  ninety  days  those  bills  will  come  back  and  have  to  be 
paid.     What  rate  has  to  be  paid  in  order  to  secure  de- 
mand bills  with  which  to  meet  the  maturity  of  the  "nine- 


MI.(  IIAMSM  OF  THE  EXCHxVNGE  MARKET      441 

tics"  ori^niuilly  sold  will  !iave  a  good  deal  to  do  with  what 
tlicv  will  make  on  the  transaction.  If,  during  the  life  of 
till'  loan,  exchange  rates  have  gone  down,  they  will  be 
a  ilk'  to  buy  in  the  necessary  demand  exchange  at  a  low 
pi'iie  and  make  good  profit  on  the  transaction.  But  if 
rates  in  the  meantime  have  risen,  a  price  may  have  to  be 
paid  for  the  necessary  exchange  which  will  wipe  out  all 
profit  on  the  transaction.  Not  infrequently  it  happens 
that  enough  of  a  rise  in  exchange  takes  place  to  cause  the 
whole  operation  to  show  an  actual  loss  to  the  lender. 

In  the  other  kind  of  a  foreign  'oan  where  the  lending 
banker  does  not  care  to  take  the  risk  of  exchange,  he 
le.Kls  out  bills  of  exchange  instead  of  dollar  proceeds  of 
bills  of  exchange,  and  charges  a  commission  instead  of 
a  fixed  rate  of  interest.  The  borrower,  in  this  case,  in- 
stead of  receiving  a  check  for  $100,000,  would  receive  a 
ninety-day  bill  for  £20,000.  This  he  would  immediately 
sell  for  dollars,  but  when  th^  time  for  repayment  came 
alojig  three  months  later,  he  would  have  to  pay  back,  not 
dollars  but  a  demand  draft  for  £20,000  plus  the  com- 
mission (usually  %  per  cent  on  ninety-day  loans).  In 
this  case  it  is  evident  that  it  is  the  borrower  who  takes  all 
the  risk  of  exchange,  the  cost  of  the  loan  to  him  depend- 
ing upon  what  he  has  to  pay  for  the  £20,000  demand 
which  he  must  return  at  the  end  of  ninety  days.  The 
banker,  of  course,  makes  only  the  commission,  but  that  is 
fixed— he  knows  exactly  what  his  profit  is  going  to  be. 

Because  of  the  speculative  element  which  attaches  to 
loans  of  foreign  money  in  this  market,  they  are  a  favorite 
form  of  operation  with  many  houses.  Take,  for  in- 
stance, the  case  of  a  borrower  of  money  who  figures  out 
that  the  exchange  market  is  bound  to  decline  within  a 
few  months.  By  getting  some  foreign  banker  to  lend 
money  to  him  on  the  basis  of  his,  the  borrower,  taking 


/ 


44> 


FOREIGN  EXCHANGE 


i 
i  I 

i 


f      I 


the  risk  of  exchange,  he  can  practically  get  himsel 
short  of  the  exchange  market,  and  if  he  Ys  right  in  h 
forecast  he  can  get  the  use  of  the  money  for  nothini 
or  even  make  a  profit  out  of  the  deal.  Similarly  wit 
the  hanker.  Frequently  it  happens  that  foreign  mone 
IS  pressed  on  the  market  here  on  the  idea  that  exchang 
rates  are  about  to  go  down  and  that  the  lender  of  th 
money,  by  assuming  the  risk  of  exchange  himself,  cai 
make  a  big  return  on  the  money  put  out. 

283.  Finance  biUs.—These  are  the  other  great  clas 
of  bankers'  long  bills  in  the  exchange  market.     Con 
cernmg  the  exact  meaning  of  "tinance-biU"  it  is  sur 
prising  what  a  difference  of  opinion  exists  even  amon^ 
well-informed  writers  on  exchange;  but  concerning  th( 
present  meaning  of  the  term  as  it  is  used  in  the  exchange 
market  m  Xew  York,  there  is  no  chance  for  any  differ 
ence  of  opinion.     Among  practical  exchange  men  a 
finance-bill  means  just  one  thing— an  unsecured  long 
bill  of  exchange  drawn  by  a  banker  in  one  country  on 
a  banker  in  another  and  sold  for  the  purpose  of  raising 
money.     Sometimes  the  drawer  carries  a  balance  with 
the  drawee,  sometimes  not;  usually  not,  the  drawee  "ac- 
cepting" the  long  bill  drawn  upon  him  for  a  fixed  com- 
mission.    Xeedless  to  say,  the  house  abroad  has  to  have 
a  high  opinion  of  the  house  here,  or  has  to  be  in  prettj- 
close  connection  with  it,  before  it  will  agree  to  accept 
its  unsecured  drawings  to  any  extent. 

This  is  the  finance-bill  as  it  is— not  widely  different 
from  accommodation  paper  among  international  bank- 
ers. The  house  of  Jones  and  Company  in  New  York, 
which  enjoys  good  standing  and  has  close  connections 
with  Smith  and  Company  in  London,  wants  to  raise 
additional  money  for  some  purpose.  A  credit  is  ar- 
ranged with  Smith  and  Company  in  London  and  the 


Mi:(  NANISM  OF  THE  EXCHANGE  MARKET   14.i 


New  York  house  draws  upon  them  in  sterling  for  the 
amount  required.  The  bills  are  then  sold  and  Jones  and 
Coinpany  finds  itself  in  possession  of  the  money  it  needs. 
I'oi-  ninety  days  it  has  the  use  of  that  money,  at  the 
end  of  which  time  the  bills  it  drew  in  the  first  place 
will  he  coming  due  and  demand  drafts  will  have  to  he 
sent  across  to  meet  the  maturity.  Usually  the  arrange- 
ment calls  for  the  nrivilege  of  renewal,  which  works  out 
as  follows: 

Sui)pose  at  the  end  of  ninety  days,  Jones  and  Com- 
pany in  New  York  find  it  inconvenient  to  put  up 
money  with  which  to  buy  demand  exchange  in  "cover" 
of  the  bills  they  drew  ninety  days  previously.  Yet 
those  bills  are  maturing  and  have  to  be  met.  So,  in 
order  to  raise  the  money  with  which  to  buy  the  necessary 
demand  exchange,  Jones  and  Company  sell  a  fresh  lot 
of  ninety-day  bills.  Just  here  there  is  an  important 
point  to  be  noted.  To  take  a  concrete  case,  suppose 
tluit  Jones  and  Company  of  New  York  originally  drew 
£10,000  of  ninetj'-day  sight  bills  and  that  the  exchange 
market  did  not  materially  change  between  the  time  the 
bills  were  drawn  and  the  time  when  it  became  necessary 
to  "cover."  Say  that  when  the  "nineties"  were  sold 
Jones  and  Company  realized  $48,700  for  them,  demand 
exchange  standing  at  487.  The  finance-bills  fall  due 
and  have  to  be  covered,  but  Jones  ara  Company  decide 
to  renew  them  by  drawing  more  nineties.  From  the 
sale  of  £10,000  nineties  at  484  they  would  not  realize 
within  $300  of  enough  to  buy  the  necessary  demand 
at  487.  That  difference  represents  the  interest  on  the 
transaction.  Usually,  when  connections  are  close,  in- 
stead of  drawing  for  exactly  £10,000,  the  second  time, 
Jones  and  Company  of  New  York  w^ould  draw  for 
enough  more,  say  £10,060,  so  that  there  would  be  no 


4U 


FOREKiN  EX(HAN(JK 


real  balarice  to  pay.  Such  a  process  iiiav  be  contiimc.l 
indefinitely— is  being  continued  indefinitely,  in  fact  bv 
many  banking  houses  in  New  York  who  have  come  to 
regard  the  money  to  be  raised  bv  the  sale  of  these 
finance-})ills  as  part  of  their  regular  working  capital. 

284.  I^imitatinns  to  finance  paper  issue— Where  is  ih 
limit  to  the  practice?     Only  in  the  credit  of  the  houses 
concerned,  in  the  willingness  of  the  exchange  market 
here  to  absorb  offerings  of  their  long  paper  and  the  will- 
ingness of  the  London  bankers  to  discount  it  when 
it  is  sent  abroad.     Otherwise  there  is  no  check  upon  the 
amount  of  finance-paper  that  a  house  might  put  out 
JNo  mark  distinguishes  it  from  any  other  kind  of  long 
bill;  the  banker  who  buys  it  cannot  tell  whether  he  is 
buying  a  bill  of  exchange  secured  by  railroad  first 
mortgage  bonds  or  whether  it  is  a  finance-bill  put  out 
with  nothing  back  of  it  to  "raise  the  wind."     There  is 
no  way  for  him  to  tell.     His  protection  and  his  only 
protection  is  in  the  character  of  the  drawer  and  the 
acceptor  and  in  his  knowledge  of  how  much  of  the  paper 
there  may  be  knocking  around  in  the  open  market 

Finance-bills  have  at  times  played  a  very  important 
part  in  our  financial  history,  the  last  time  being  in  1906 
and  1907.  That  episode  was  thus  recently  described  by 
John  Gardin,  vice-president  of  the  National  City  Bank. 
New  York. 

Finance  bills  were  Issued  in  this  country  up  to  the  spring 
of  1907  m  enormous  quantities.  It  was  estimated  that  in  the 
fall  of  the  year  when  these  bills  generally  are  paid  off,  there 
was  running  all  the  way  from  $250,000,000  to  .$300,000,000 
m  finance  biUs.  The  merchants,  particularly  here  in  the  East 
have  credits  in  the  financial  institutions  abroad  and  sell  these 
b.lls  here  and  get  thoir  money.  The  brokers  in  Wall  Street  in- 
stead of  negotiating  time  money  here,  negotiate  sterling  loans. 


Mi;(  iiAMSM  OF  Till-:  i:xaiAN(iK  MARKET       ilJ 


'I'li(M'  loans  arc  generally  put  out  in  the  spring  of  the  year  wlicn 
(Acli.iii^fo  is  high,  due  to  the  cnonnous  amount  of  imports  that 
li.ivf  to  he  paid  for.  They  are  generally  issued  so  as  to  hring 
tli(  ir  maturity  in  the  fall  when  the  exports  of  staples  from  thir; 
(diintry  prevail  and  exchange  rates  are  very  low.  The  result  is 
that  where  a  man  issues  a  bill  originally  when  exchange  is  high 
and  ndconis  it  when  the  exchange  is  low,  together  with  the  con> 
iiii»I«)n  he  has  to  pay  and  the  discount  he  has  to  allow,  he  finds 
as  a  general  rule  lie  pays  a  very  low  rate  of  interest;  in  some 
(JIMS,  1  to  1 '  \  per  cent. 

Ill  1906,  before  the  San  Francisco  disaster,  we  had  quite  a  large 
^rold  importation  and  a  great  howl  was  raised  in  England  by 
the  financial  writers  to  the  effect  that  the  enormous  gold  importa- 
tions were  facilitated  by  the  credits  granted  for  these  long  bills, 
l)v  lianks  over  there  permitting  their  names  to  be  used.  There 
was  quite  a  crusade  against  them.  Any  bank  in  London  mak- 
in<^  a  practice  of  loaning  money  in  this  country  by  means  of 
these  acceptances  was  looked  down  upon.  In  1907  most  of  these 
crtdits  were  canceled.  I  don't  believe  $25,000,000  or  $30,- 
()(;(),()00  were  owing  to  Europe  in  July  and  August  on  the 
strength  of  these  credits.  The  result  was  that  when  the  export 
season  started  in,  due  to  the  hard  time  we  were  having,  and  ex- 
j)i)rts  assumed  undue  proportions,  there  was  no  offset  in  the  way 
of  the  redemption  of  these  credits.  In  consequence,  Europe  had 
to  give  up  its  gold. 


CIIAPTKR  II 

HOU'  MONEY  IS  MADE  IX  FOREIGN  EXCHANGE 

285.  The  mlc  of  demand  carhanffc-Voreiau  t 
clmn^re  ,.a„.sacti<,ns,  nowadays,  are  of  considerable  sco 
and  eijdless  variety,  hut  all  are  based  fundamentally , 
five  different  kinds  of  operation.  ^ 

Selling   demand   exchange   and   cables   against  r 

m.tta..ces  of  den.and  exchange  is  the  elementaVprin 

pie  of     e  business.     Suppose  an  exporter  here  to  ha, 

hipped  $5,000  worth  of  merchandise  and  to  have  dr^ 

us  draf    on  the  foreign  buyer  for  £l,000.     He  tab 

this  draft  to  his  banker  and  sells  it  at  the  current  r 

of  exchange,  say  485.     The  latter  sends  the  bill  t 

his  correspondent  abroad   for  credit  of  his  accounl 

drawmg  at  the  same  time  his  own  check  for  £l  00( 

against  the  deposit  rnd  endeavoring  to  sell  it  at  a  highei 

rate  than  485      Outside  the  expense  of  conducting  th' 

business,  anythmg  over  485  that  he  can  get  for  his  drafi 

;s  clear  proht.     The  two  transactions  cross  off.     It  cost 

mm  Jj?4,850  to  buy  the  commercial  draft  in  the  first 

{P4.8b0.  He  may  not  have  been  out  of  the  use  of  his 
money  for  five  minutes,  and  as  to  his  balance  on  the 
other  side,  the  deposit  of  £l,000  and  the  draft  on  the 
balance  for  £1,000  arrive  by  the  same  mail  steamer. 

280.,  ^Merchant  seller's  credit-^ aturaWy,  the  credit 
of  a  merchant  selling  a  commercial  draft  enters  very 
largely  into  the  transaction-determines,  in  fact,  what 
rate  the  banker  is  willing  to  pay  him  for  his  bill  of  ex- 

446 


now  MONKV   IS  AIADi: 


447 


clum.i'c.     Here,  evidently,  is  a  elianee  for  taking  risks 
and  making  profits.     Jt  not  inf're<|uently  happens  that 
a  liaiikt  r  eonies  to  helieve  that  some  exporter  who  is  not 
.ft  iR-rally  eonsidered  strong  finaneially  is  really  all  right, 
and  he  hiiys  his  paper  continually,  though  always  at  a 
I)i^r  reduction  from  the  market  for  prime  bills.     Two 
ants  |)er  pound  sterling  is  not  infrecpiently  the  profit 
MM  purchases  of  exchange  of  this  kind.     It  is  a  form 
(.('  husiness  which  a  gfxxl  many  hankers  refuse  to  touch 
at  Jill,  hut  on  the  other  hand  there  are  foreign  exchange 
houses  with  Mell-equipped  credit  organizations  who  go 
in  largely  for  just  such  transactions,  and  as  long  as  they 
can  avoid  the  purchase  of  bad  paper  they  make  very 
large  profits.     The  business,  too,  can  be  done  with  a 
varynig  degree  of  risk,  one  banker  being  often  in  a 
j)nsiti()n  to  sell  his  own  demand  draft  at  a  little  better 
rate  than  he  is  offered  the  demand  draft  of  some  other 
hariker.     In  that  case  the  profit  is  apt  to  be  small  but 
so  is  the  risk,  and  an  easy  chance  is  afforded  to  make 
from  one-tenth  to  one-quarter  cent  per  pound  sterling 
on  tlie  amount  turned  over. 

Tlie  other  form  of  activity  along  this  line  is  the  sell- 
ing of  "cables"  against  remittances  of  demand  drafts. 
A  cable  transfer  works  as  follows:     A  in  Xew  York 
has  a  credit  balance  in  London;  B,  also  in  Xew  York, 
conies  to  him  and  says,  "I  want  you  to  wire  your  cor- 
respondent in  London  to  hand  over  so-and-so-much  in 
pounds  to  my  correspondent  over  there.     I'll  pay  you 
the  c(iuivalent  on  this  end."     The  rate  is  fixed  and  A 
wires  to  the  London  bank  which  holds  his  money  to 
make  the  transfer  to  B's  bank,  the  whole  operation  being 
closed  inside  of  twenty-four  hours.     In  point  of  time 
we  are  five  hoiirs  behind  London  so  that  unless  the  trans- 


ff 


us 


lOIIKKiN   KXdiANdi: 


I'cr  is  uircci  early  in  tl.c  „,„r„i„^  it  will  uu\y  lake  n|a, 
the  tollou  iii^  (Jay.  ' 

287.  BmkcrH  London  halamc~ln  order  to  k^  ab 

to  sen  eahle  transfers,  the  hanker,  clearly,  nmst  can 

«n  adequate  h„|„nee  in  London  and  must*  he  constant 

rq,len.slnnK  .t  with  deposits  of  exchange.     Son.etin 

when  his  halanee  has  run  down  and  he  fin<ls  he  ean  se 

a  eahle  very  advantageously  he  will  ^o  ahead  and  ,1 

It.  mak,nK  tf»od  the  deficit  hy  buying  a  cable  hin.sei 

at  a  lower  rate     But  this  selling  of  cables  against  cable 

.unusual  and  takes  place  only  under  exceptional  Jn 

coitions.     Bankers  who  make  a  practice  of  selling  cable 

usually  see  to  it  that  their  balances  are  kept  up  by  con 

tinuous  remittances  of  exchange.     They  have  bills  arriv- 

ing  in  London  by  every  mail  for  credit  of  their  account 

and  are  almost  invariably  in  a  position  to  wire  their  cor 

respondent  to  pay  out  large  sums  to  whomsoever  may 

be  designated  m  the  cable.     The  cable,  incidentallv.  in- 

vdving  as  It  does  the  payment  of  large  sums  of  cash,  is 

the  product  of  an  elaborate  cipher  code,  and  is  arranged 

sT^y  :f^^^^^^^^^  ^"'  '^^'-^^'^^  *^^  p--*  -y  P- 

288.  Interest  on  cable  transfers.— C&hh  transfers  be- 
mg  immediate,  command  a  higher  rate  of  interest  than 
even  the  primest  of  demand  drafts,  which  must  neces- 
sanly  he  on  board  ship  for  a  week  before  they  become 
of  any  practical  use  to  the  purchaser.  The  purchaser 
ot  a  cable  transfer,  in  fact,  loses  no  interest  at  all.  He 
makes  payment  here  and  simultaneously  the  money  is 
paid  over  to  the  credit  of  his  account  abroad.  In  the 
case  of  a  demand  draft  he  makes  payment  when  he  buys 
the  draft  and  for  a  whole  week  is  out  of  the  use  of  his 
money.  The  interest  rr.te,  therefore,  is  one  of  the  prime 
factors  Ml  determining  the  difference  in  the  rate  of 


now  .MONKY  IS  MADE 


un 


exchange  between  cables  and  demand  bills.  When 
money  is  high  the  buyer  of  demand  bills  loses  a  g(xx\ 
(leal  of  interest  and  the  quotations  tend  to  diverge. 
When  money  is  cheap  the  quotations  come  verj'  near 
to^rcther.  During  the  long  1908-09  period  of  cheap 
money,  cable  transfers  and  demand  bills  of  exchange 
eotitirnially  sold  less  than  one-half  cent  per  pound  stcr- 
h'ng  apart. 

I'nder  such  conditions  there  is  but  little  money  to  Iw 
made  out  of  cable  transfers  against  remittances  of  de- 
mand exchange,  but  the  business  is  clean  and  safe  and 
the  small  margin  of  profit  amounts  to  a  good  deal  of 
money  where  the  sum  turned  over  is  large.     There  are 
some  financial  institutions  in  the  larger  cities  whose 
poliey  it  is  to  keep  large  sums  on  deposit  in  London  and 
Paris  and  who  make  a  specialty  of  selling  cable  trans- 
fers against  these  deposits,  replenishing  them  continu- 
ally with  remittances  of  prime  bankers'  bills.     Fifteen 
points  (that  is  to  say  13/100  of  a  cent  per  pound  ster- 
hng)  is  considered  a  fair  profit  on  business  of  this  kind. 
In  the  course  of  a  day's  business,  for  instance,  if  one 
of  these  banks  sold  £30,000  of  cables  the  net  profit 
would  probably  figure  out  to  be  between  $75  and  $100. 
Not  a  very  large  amount  on  a  transaction  involving  a 
(piarter  of  a  million  dollars,  but  enough  to  make  a  good 
many  banks  engage  in  the  business  and  on  a  large  scale. 
289.  Against  remittances  of  sixty  and  ninety  day  bills. 
—Selling  demand  drafts  against  remittances  of  sixty 
and  ninety  day  bills  is  the  second  important  form  of 
aetivity  in  foreign  exchange,  operations  of  this  kind 
constituting,  in  fact,  the  main  bulk  of  t:ie  business. 
Most  of  the  merchandise  sold  in  Europe  by  American 
merchants  is  sold  on  a  sixty  or  ninety  day  basis;  that  is 
to  say,  a  cotton  firm  which  has  sold  cotton  in  Liverpool, 

C— VI/I— 39 


f 


4.50 


FORKIGX  EXCHANGE 


or  a  prrain  house  which  has  sold  grain  in  London,  is  ar 
to  <h'aw  Its  drafts  against  the  merchandise  shipped  a 
s.xty  or  ninety  days'  sight  Some  of  these  drafts  ar 
(huwn  direct  upon  the  foreign  buyers;  some  of  then 
on  foreign  banks  designated  by  the  buyers  with  M'hon 
they  have  opened  credits  for  the  importation  of  thi 
merchandise. 

290.  A  typical  examplc.—ln  any  case,  practically  ali 

of    hese  sixty  and  ninety  day  drafts  are  bought  bv 

Ijankers  who  want  to  use  them  in  the  conduct  of  their 

foreign  exchange  business.     A  cotton  firm  in  JNIemphis 

lor  instance,  has  sold  100  bales  of  cotton  in  Liverpool 

and  drawn  the  draft,  as  previously  explained,  with  the 

proper  documents  attached.     The  bill  is  then  sold  to  a 

banker,  perhaps  in  3Iemphis  or  in  Xew  York.     Sup- 

pose   for  the  sake  of  illustration,  that  it  has  been  sold 

to  .Alessrs.  Jones  and  Company  in  Xew  York,  who  pav 

a  rate  for  it  according  to  the  standing  and  strength  of 

the  drawer  and  the  "usance"  of  the  bill— the  time  for 

which  it  runs.     A  bill  running  for  ninety,  days,  for 

instance,  commands  a  lower  rate  of  exchange  than  a 

bill  on  which  the  holder  can  get  his  money  at  the  end  of 

sixty  days. 

Jones  and  Company  in  Xew  York  having  received 
the  bill  and  paid  for  it,  immediately  send  it  to,  say, 
Smith  and  Company  in  London.     What  happens*  then 
depends  upon  the  nature  of  the  bill,  whether  the  docu- 
ments are  for  "acceptance"  or  "payment"  as  explained 
m  section  174.     If  the  documents  are  to  be  ddivrjcd 
on  acceptance,  Messrs.  Smith  and  Company  get  the 
bill  accepted  as  soon  as  p«jssible  and  t!;en  have  it  dis- 
counted in  the  open  market,  placing  the  proceeds  to  the 
credit  of  Jones  and  Company,  Xew  York.     If  the  docu- 
ments are  deliverable  on  payment  only,  Smitb  and  Com- 


now  MONEY  IS  MADE  4.31 

n.niy  irct  tlic  bill  accepted  just  the  same,  retaining  the 
wdi'iniieiits,  however,  until  the  consignees  come  around 
and  offer  to  pay  the  draft  under  rebate  of  interest  for 
the  unexpired  time.  In  the  case  of  an  "acceptance" 
!.ill,  therefore,  tlie  proceeds  become  an  available  balance 
al)n)ad  just  as  soon  as  the  bill  can  be  accepted  and 
discounted.  In  the  case  of  a  "payment"  bill,  the  remit- 
[h\^  banker  cannot  count  on  having  the  balance 
available  until  the  bill  actually  comes  due,  though 
piv-payment  may  place  the  funds  to  his  credit  long 
I)tl'ore  that  time. 

291.  Opportunity  for  profit.— Hence  in  the  remitting 
of  sixty  and  ninety  day  documentarv  "payment"  and 
"acceptance"   bills   and  the  drawing  of  bankers'   de- 
mand drafts  against  the  proceeds,  there  is  a  good  deal 
of  leeway  and  a  chance  to  make  considerable  profits. 
Rates    commanded    by    the    documentary    bills    vary 
^^i(lely;  discount  rates  abroad  vary  on  different  bills; 
■payment"  bills  are  prepaid  at  varying  periods  before 
their  maturity.     Altogether,  when  a  banker  begins  .3 
engage  in  remitting  large  amounts  of  commercial  long 
paper  and  drawing  his  own  drafts  against  the  resulting 
balance,  he  is  undertaking  a  form  of  operation  the  profit 
:)n  which  is  governed  by  a  number  of  different  factors. 
202.  Loaning  foreign  money  on  joint  account.— This 
is  another  profitable  form  of  activity  for  a  foreign  ex- 
Hia.ige  department.     Description  o*f  the  bankers'  long 
hills  arising  from  operations  of  this  kind  has  already  been 
yiyen,  but  for  a  clearer  understanding  of  the  matter 
it  is  necessary  to  know  the  theoretical  as  well  as  the  prac- 
tical end. 

293.  Ninety-day  hill  operation.— VndevWmg  all  op- 
erations in  the  loaning  of  foreign  money  in  this  mar- 
ket is  the  idea  that  a  ninety-day  bill  of  exchange  drawn 


^ 


4.32 


FORKKiX  EXriIAN(.E 


by  a  banker  here  upon  a  banker  al)road  can  be  readib 
converted  into  .Vmerican  money.  A  banker  on  th, 
"ther  side  who  makes  up  his  mind  to  loan  £10,000  ir 

u7  ]      . ''."''?  '''"'^  "^^""  *"  P"^  "P  '-^"y  i-eal  money 
all  he  has  to  do  is  to  "accept"  a  ninetv-dav  draft  draM-,, 

upon  him.  This  is  something  which  it  is  exceedinffh 
important  to  bear  in  mind.  The  loaning  banker  is  mi 
limited  by  the  amount  of  his  deposits  or  even  by  the 
amount  ol  his  capital,  except  insofar  as  other  bankers 
et  these  considerations  govern  them  in  the  amount  cf 
his  paper  that  they  are  willing  to  take  on.  But  as  lonff 
as  the  discount  market  absorbs  the  long  bills  he  has 
"accepted,"  he  can  go  on  accepting  up  to  any  amount 
lie  chooses. 

As  previously  explained,  the  foreign  banker  "ac- 
cepts   these  drafts  drawn  upon  him  on  the  understand- 
ing that  before  they  fall  due,  demand  exchange  will 
have  been  sent  him  by  the  drawers  of  the  long  bills  with 
which  to  pay  them  as  they  are  presented.     Suppose  for 
instance,  that  in  one  of  these  loaning  operations,  A  in 
^e^y  \  ork  has  drawn  a  ninety-day  bill  in  pounds  ster- 
ling on  B  in  London,  and  that  B  has  "accepted"  the 
draft.     B  has  not  put  out  any  real  money;  all  he  has 
done  IS  to  put  his  name  on  the  draft,  obligating  himself 
to  pay  It  at  the  end  of  ninety  days.     By  that  time,  he 
well  knows,  his  correspondent  in  New  York  will  have 
sent  him  demand  bills  out  of  which  to  make  the  pay- 
nient.  ^  ^ 

294.  Loaning  on  credit— In  considering  the  question 
of  loaning  out  foreign  money  from  the  standpoint 
ot  the  bankers  engaged  who  want  to  make  money  out  of 
It,  It  is  to  be  noted  that  neither  the  banker  abroad  nor 
the  banker  here  are  ever  out  of  any  actual  cash  at  any 
time.     The  foreign  banker,  as  has  been  seen,  "accepts" 


HOW  MOXF.Y  IS  JIADE 


4.>3 


.1  draft  and  later  receives  the  nicdiiim  >vitli  which  to  pay 
it.     The  American  broker  (h-UAvs  tiic  loan-bills,  puts  out 
tlie  money  as  agreed,  and  gets  it  back  in  time  to  remit 
the  necessary  demand  exchange  to  the  banker  abroad 
who  has  done  the  "accepting."     Xeither  party,  then, 
has  liad  to  put  up  a  cent  of  capital.     Credit  only  has 
entered  into  the  transaction,  and  anything  that  has  been 
made  out  of  it  is  clear  profit.     Sometimes  the  operation 
is  tiansacted  with  the  foreign  banker  taking  all  the  risk 
and  all  the  profit  except  the  commission  he  allows  to  his 
American  representative.     Sometimes  the  operation  is 
transacted  on  joint  account.     In  that  case  the  risk  and 
the  profits  are  equally  divided.     Such  an  arrangement 
works  rather  to  the  advantage  of  the  foreign  banker, 
assuring  him  as  it  does  of  the  utmost  tare  in  the  han- 
dhng  of  the  money.     As  for  the  commission,  in  order 
to  get  the  business  properly  taken  care  of  on  this  end, 
he  lias  in  any  case  to  pay  some  American  banker  very 
neaily  half  of  what  he  can  make  out  of  the  transaction. 
29.5.  Risk  of  e.rchange.— Bearing  further  upon  this 
question    of   commission,    it   is   to    be   noted   that"  it 
makes  a  great  deal  of  diiference  whether  the  money 
is  loaned  out  under  an   arrangement   by  which  the 
banker  takes  the  risk  of  exchange,   or  whether  the 
borrower  takes  that  risk— as  fully  explained  in  par- 
a^naph  178.     In  the  case  where  the  banker  takes  the 
risk  of  exchange  he  receives  just  so  and   so  much 
fioni  the  borrower,  3,  4,  5  per  cent  as  the  case  may  be, 
and  out  of  that  has  to  come  the  difference  between  what 
he  was  able  to  realize  from  the  sale  of  the  ninety-day 
loan  bills  and  what  he  has  to  pay  for  the  "cover"  ninety 
days  later.     Even  if  the  exchange  market  has  stood  still 
in  the  meantime  this  difference  in  the  two  exchange 
rates  is  bound  to  be  quite  an  item,  and  it  reduces  what 


t 


4.54 


FOREIGN  EXniAXGK 


he  makes  on  the  whole  business  to  a  pretty  small  „e 

crntage      But  then  the  faet  must  not  be  lost  si  J  c 

hat  he  has  never  had  to  put  up  any  capital  at  all  an 

that  any^hmg  he  makes  is  elear  profit.     In  case  th 

oan  has  been  made  on  the  other  basis,  with  the  borrowe 

taking  the  risk  of  exchan^re,  the  borrower  pays  th 

banker    a   fixed    rate   of   eommission-usuallv    three 

eighths  of  1   per  cent  on  ninety-day  business.     Th 

banker  makes  that  clear,  for  the  borrower  to  whom  h 

has  lent,  say,  £10,000  of  ninety-day  bills,  is  obligate, 

to  return  to  him  i:iO,000  of  demand  exchange  at  th. 

end  of  ninety  days.     If  the  borrower  can  buy  in  thi^ 

cover    cheaply,  by  so  much  is  the  cost  of  th;  loan  t( 

him  reduced.     As  for  the  banker,  it  makes  no  differ 

ence  to  him  what  the  exchange  market  may  do;  he  get« 

his  three-eighths  per  cent  commission  (eqiial  to  4  times 

'h  per  cent  =  ihU  per  cent  per  year)  and  is  out  of  the 

transaction. 

296.  Commissions  on  loans.~l.arge  profits  are  at 
times  made  in  loaning  foreign  money  in  the  two  ways 
described.     The  interest  rate  may  seem  small  but  the 
amounts  involved  in  operations  of  this  kind  are  enor- 
mous and  even  a  small  commission  may  mean  a  verv 
large  profit-in  one  month  (October,  1902)  one  of  the 
trust  companies  doing  a  foreign  excliange  business  in 
^ew  \ork  cleared  nearly  $25,000  from  commissions 
on  sterling  loans,  excellent  collateral  being  deposited 
and  the  borrower  in  every  case  taking  the  risk    of  ex- 
change.    Examination  of  the  books  of  some  of  the  big 
banking  houses  making  a  specialty  of  lending  out  for- 
eign money  here  would  probably  show  profits  far  in 
excess  of  the  amount  made  by  this  trust  company. 
297.  Profits  made  from  the  purchase  of  exchange- 


HOW  MONEY  IS  MADE 


4.>o 


liiiyin^  foreign  exchange  for  investment  is  still  aii- 
otlicr  source  of  profit  to  the  foreign  department.  It 
sometimes  happens,  for  instance,  that  for  one  reason  or 
aiiotlier  discounts  rise  in  Europe,  driving  down  the  rate 
of  exchange  for  sixtj'  and  ninetj--  day  bills.  When  this 
takes  place,  if  money  is  easy  here,  bankers  are  likely  to 
buy  large  amounts  of  long  exchange,  not  for  the  pur- 
pose of  having  it  discounted  and  placed  to  their  credit 
as  usual,  but  for  the  purpose  c^  actually  holding  it  to 
maturity. 

298.  Time  money  rates  on  call  money  basis. — The 
purpose  of  such  an  operation  is  to  take  advantage  of  a 
depressed    market   for   long   bills.     Suppose   that   on 
account  of  one  of  Europe's  not  infrequent  war-scares 
or  for  any  other  reason,  discount  in  London  makes  a 
sharp  advance,  correspondingly  depressing  the  rate  of 
exchange  for  "sixties"  and  "nineties."     A  banker  who 
buys  the  latter  with  the  purpose  of  holding  rather  than 
of  discounting  is  pretty  sure  to  be  making  a  good  rate 
of  interest  on  the  money  he  has  laid  out.     As  the  bill 
nears  maturity  it  breaks  away  from  the  influence  of  the 
hjt^h  discount  rate,  becoming  eventuallj^  demand  ex- 
change.    In  the  meantime,  if  discount  has  gone  down, 
the  rate  at  which  the  banker  can  resell  his  bill  has  gone 
up.     For  there  is  always  a  market — always  the  closest 
kind  of  a  quotation  on  exchange  of  whatever  usance. 
After  the  bill  has  run  forty-five  days,  and  has  fifteen 
(lays  left  to  run,  the  banker,  if  he  wishes,  can  instantly 
(hspose  of  it.     And  just  here  is  one  of  the  most  attract- 
ive j)oints  about  this  business  of  investing  in  exchange — 
the  buyer  gets  time  money  rates  on  a  call  money  basis. 
The  price  he  pays  for  the  bill  is  governed  by  the  time 
rate  and  that  is  what  he  gets  if  he  holds  the  bill  to 


if 


I! 


4.';(] 


FOREIGN    EXriTAXGE 


exchange,  and  he  f'm    '    i.       *"  ^°  '''  *"  ■■«'" 
purchase;.  P™et'c<.lly  certain  to  find  a  re, 

"The  Element!  of  F^ i^^' E^h^t '•r^'' '" ''"  "^ 

of  cxcllg.  I,r  ;ri,^^  '"  ™"""-"  '"■•  "-0  future  doliv. 
broad  classes  of  Wilimul,.  T'     1       .    ^'""''  ""^  »'  ''«*'  *' 

-KIT,:,:  r:r-::r  -^^ '' — 

of  the  draft.    That  meanTli  IJ  I,        '  T^l  °"'  "?">"""' 

amounted  to  £50,000  tt"  000  „    ,        u  *  '"'"''  °'  '^'"^'>«"« 

able  balance  on  I  ,e  „  |tr  sTr         ""*'"  ""'  ^"""^  »"  »~' 

rived  there-not  unti    l,e        .       "  ^""^  "*''"  """  "  l>»d  a^ 

were  drawn  ehoseTo  ™   T    "^  °"7'"""  ""  "P"^"-'"  ^t 

rate,  in  the  .nea^t  Z  L^Md      T'"  "•""""    ^'^  -^''""«« 

mitling  banker  n,^h,    aT  M     f  7  r.f-  ""■'■"'"«•  »"''  "■=  ' 

find  himself  „iu,  „  balaL    :|,"1;'  '""''^  ?'  '"'^""ve  da,-., 

checks  onlj,  „t  very  1„!  ™L    '    '  °"       "''  ""  "''^  ^''  "^ 

draft,  for  future  deliverv        ""'""S''/''"  his  own  demand 

««,000„fc„„.erei„,";  yJjP^     ,"/  t  '"^  ""'  °'" 
when  the  process  would  ^  ,'        ""'•'''  '°  ''"  ""^'"j 

the  bill,  »1„,d,  „  vlrt  ir    "°  '"■'"'*''"''•  ""^  '"'"''-  """J-i^ 


%•, 


HOW   MONEY   IS    MADE 


4.5 


i« 


safe,  for  instance,  for  tlic  bunker  to  sell  futures  as  follows: 
t;r>,000  deliverable  in  fifteen  days;  £10,000  deliverable  in  thirty 
days,  tlO.OOO  deliverable  in  from  forty-five  to  sixty  days. 
Such  drafts  on  being  presented  could  in  all  probability  be  taken 
care  of  out  of  the  pre-payinents  on  the  commercial  bills. 

By  figuring  with  judgment,  foreign  exchange  bankers  are 
often  able  to  make  substantial  profits  on  operations  of  this 
kind.  An  exchange  broker  comes  in  and  offers  a  banker  here 
ft  lot  of  good  "payment"  commercial  bills.  The  banker  finds 
that  he  can  sell  his  own  draft  for  delivery  at  about  the  time  the 
commercial  drafts  are  apt  to  be  paid  under  rebate,  at  a  price 
wliieh  means  a  good  net  profit.  The  operation  ties  up  capital, 
it  is  true,  but  is  practically  without  risk.  Not  infrequently 
good  conmiercial  "payment"  bills  can  be  bought  at  such  a  price 
and  bankers'  futures  sold  against  them  at  such  a  price  that 
there  is  a  substantial  profit  to  be  made. 

The  other  operation  is  the  sale  of  bankers'  futures,  not 
agamst  remittances  of  actual  commercial  exchange  but  against 
exporters'  futures.    Exporters  of  merchandise  frequently  quote 
pr.ces  to  customers  abroad  for  shipment  to  be  made  in  some 
following  month,  to  establish  which  fixed  price  the  exporter  has 
to  fix  a  rate  of  exchange  definitely  with  some  banker.     "I  am 
gouig  to  ship  so-and-so  so  many  tubs  of  lard  next  May,"  says 
the  exporter   to  the   banker,   "the   drafts   against   them  will 
amount  to  so-and-so-much.     What  rate  will  you  pay  me  for 
them-delivery  next  May?"    The  banker  knows  he  can  sell  his 
own  draft  for  May  delivery  at,  say,  4.87.    He  bids  the  exporter 
4.86M.  for  his  lard  bills,  and  gets  the  contract.    Without  any 
risk  and  without  tying  up  a  dollar  of  capital  the  banker  has 
made  one-half  cent  per  pound  sterling  on  the  whole  amount  of 
ti.e  shipment.    In  May,  the  lard  bills  will  come  in  to  him,  and  he 
will  pay  for  them  at  a  rate  of  4.86  >!.,  turning  around  and  de- 
livering his  own  draft  against  4.87. 

Selling  futures  against  futures  is  not  the  easiest  form  of  for- 
eign exchange  business  to  put  through,  but  when  a  house  has  a 
large  number  of  commercial  exporters  among  its  clients  there 
are  generally  to  be  found  among  them  some  who  want  to  sell 


7 


\ 


.  ! 


tJ8 


FOi;Eir.\    EXCHANGE 


their  cxchanfTO  for  future  delivery.  As  to  the  buyer  of  tl 
banker's  "future,"  such  a  buyer  iiii^^ht  be,  for  instunee,  aiioth 
banker  who  had  sold  finance-bills  and  wanted  to  limit  the  cost  i 
"covering"  them. 

The  foregoing  examples  of  dealing  in  futures  arc  mere! 
examples  of  how  futures  may  figure  in  every-day  exclmnj 
transactions.  Like  operations  in  exchange  arbitrage,  thei 
is  no  limit  to  the  number  of  kinds  of  business  in  whic 
"futures"  may  figure.  They  are  a  much  abused  institutioi 
but  are  a  vital  factor  in  modern  methods  of  transacting  foreig 
exchange  business. 

800.  Arhitr aging  in  exchange.— T\\h  is  another  im 
portant  part  of  the  activity  of  the  foreign  departmenl 
Arbitrating  may  best  be  described  as  the  purchasin| 
of  exchange  on  one  country  through  another  country 
Conditions  often  arise,  for  instance,  which  make  it  cos 
less  dollars  to  send  a  given  number  of  francs  to  Pari 
by  buying  them  in  London,  with  a  sterling  bill,  than  t( 
buy  them  here  in  New  York.  Even  very  slight  ad 
vantages  gained  in  this  way  may  amount  to  considerabh 
profit  on  a  large  volume  of  transactions. 

801 .  ^  rhitraging  illustrated.— To  illustrate  with  a  con 
Crete  case:  Suppose  a  banker  in  New  York  sells  a  25,- 
250  franc  draft  on  Paris,  at  the  rate  of  5.17I/2  (5  francs, 
17M.'  centimes  to  the  dollar).  That  means  that  he 
realizes  from  its  sale  $4,879.23.  Making  up  his  mind 
to  cover  through  London,  he  finds  that  the  check-rate 
on  London  is  4.84,  which  means  that  he  can  buy  a  £l,OOC 
draft  on  London  for  $4,840.  Cabling  to  London,  he 
finds  that  the  rate  there  on  Paris  is  25.25  (£l  =  fcs, 
25.25)  B.ne  that  £1,000  will  therefore  exactly  buy  the 
francs,  25,250,  he  needs.  lie  goes  ahead,  therefore, 
and  pays  out  $4,840  for  the  £1,000  draft  on  London, 
sends  it  to  London  with  instructions  to  his  correspond- 
ent to  buy  with  it  francs  25,250,  and  directs  that  these 


HOW  MONEY  IS  MADE 


4a!) 


fniiics  l»f  stilt  to  Paris  to  the  credit  of  his  account.  On 
tilt  other  side  the  transaction  just  matches  off — he  drew 
I'raiics  2.5,250  on  Paris  and  he  has  deposited  there  ex- 
actly the  same  amount.  But  on  this  end  lie  is  ahead. 
He  took  in  }j54., 879.28  originally  and  has  spent  only 
s-t,840. 

'M)-2.  Arbit raging  operations.— This  is  of  course  only 
the  .sirnj)lest  form  of  arbitrage  but  it  is  typical  of  transac- 
tions being  continually  made.  A  recent  article  in  the 
\nc  York  Financier  says: 

III  coiuliicting  such  operations  it  is  essential  that  tlie  banker 
>liall  he  advised,  through  tiie  cable,  of  tlie  varying  conditions 
of  the  markets  ahroad.      In  such  markets  as  Paris  and  London, 
hIrio  the  exchange  transactions  are  always  large,  rates  often 
fluctuate   sharply    and    conditions    change    frequently.     Conse- 
qiRiitly,  though  the  situation  may  be  favorahle  one  day  it  may 
siuldcnly  hecome  adverse,  necessitating  some  modification  of  the 
nutliod  of  arbitraging.     Moreover  it  frequently  happens  that 
at'tir  a  successful  negotiation  has  been  effected  by  a  banker  as 
the  result  of  private  information,  his  competitors  may  be  ad- 
viseil  of  the  favorable  conditions  prevailing  and  they  also  may 
draw  In  a  similar  manner.     Hence  each  operator  seeks  to  obtain 
for  himself  alone  all  possible  information   regarding  changes 
wliidi  are  likely  to  affect  his  business.     Sometimes  a  banker  may 
fiiui,  upon  calculation,  that  it  will  be  profitable  to  conduct  arbi- 
trating of  exchange  between  three  or  more  points ;  in  such  cases 
the  conditions  at  each  of  the  points  must  first  be  ascertained 
and  calculations  have  to  be  made  with  the  utmost  care.     Occa- 
sionally in  drawing  bills  the  banker,  in  order  to  take  advantage 
of  abitraging   operations,    will    transfer   credits,   through    the 
cable,  from  an  adverse  center  to  a  point  favorable  for  his  pur- 
pose.    Indeed  there  are  very  many  ways  by  which  arbitraging 
f-'in  be  profitably  conducted  by  bankers  lia\  ing  the  requisite  fa- 
cilities and  the  necessary  skill  for  such  operations.     It  will  be 
observed  that  operations  in  arbitraging  of  exchange  require  the 


100 


FOREIGN  EXCHAXGK 


Hcrviccs  of  men  of  the  larficst  cxpcrionco,  and  hence  tljc  hiisinci- 
can  be  conjlucttd  to  advantage  only  in  the  most  tliorou^jhl 
equipped  offices.  The  exchange  student  who  enjojH  opportuni 
ties  for  practice  in  Mich  offices  and  has  the  determination  t( 
qualify  liiniself  fo.-  this  branch  of  exchange  work  by  ocquirinj 
a  knowledge  of  all  of  its  intricate  details  will  have  no  difficult^ 
after  such  qualification  in  securing  advancement.  The  field  foi 
operations  in  arbitraging  of  exchange  is  continually  and  rapidlj 
broadening,  and  there  will  probably  always  be  a  deniand  for  tlu 
services  of  men  capable  of  taking  positions  as  managers  of  ex 
change  houses  or  departments. 


APPUCATION  FOR  COMMERCIAL  CREDFP 


New  York,. 


^••••««*MtM 


GtARANTY  TrU»T  CoHPANT  OF  NeW  VoRK, 

Drar  Sin. 

PUoM  iaaue  for  our  aeeount  a  Doeumtntarg 
Credit  in  favor  of 


for  £.. 


draftaat.. 


igainst. 


.*oat  of  ihipment  of.. 


iTom. 


In  force  untU  first  day  of.. 


Insurance  effected  in.. 


Kindly  advise  the  Credit  by  „*""" 


Mail. 


Yours  truly. 


4S1 


APPLICATION  FOR  CIRCl  LAR  LETTER  OF  CR1.DIT 


Xew  York, 

Cmmnty  Trwtt  Compnny  0/  Xrw  York. 
28  Xasitau  Street, 

(Mutual  Li/e  Building). 
I>car  Sir$: 

Pkasc  issue  your  Circular  Letter  0/  CrtdU 

£ 

/or 


of.. 


or. 


l«MMMMMa,.„M, 


to  nad  in  faro 


and  to  remain  in  loree  for  ^.^n,.  1         j  .      ,   . 

'        '"^ moniha  from  daU  of  issue.    At  foot 

we  affix  specimen  signatures. 

Yours  truly, 


••••••••••••••MMMMMMMHMVVM 


***—>—■••■■■■  M  W 


4aa 


CHAPTER  III. 

FOREIGN   EXCHANGE  AND   IMPORTS 

m:i.  Commercial  credits.— The  financing  of  ex  porta 
nml  imports.— During  the  past  ten  years  there  has 
unnvu  up  a  system  of  interrelation  between  the  imiK)rt 
houses  and  the  bankers  which  is  entirely  different  from 
anything  that  has  ever  been  seen  before.  Due,  prob- 
al)Iy,  to  our  territorial  expansion  and  the  great  gain  in 
our  foreign  commerce,  there  has  been  an  enormous  in- 
crease in  the  amount  of  banking  capital  used  in  mer- 
catitile  business  and  a  corresponding  cementing  of  the 
ties  between  the  merchant  and  the  banker. 

Twenty  years  ago  the  financing  of  imports  i  d  ex- 
|K)rts  at  any  given  commercial  center  was  concentrated 
in  the  hands  of  two  or  three  bankers  who  understood  the 
business  and  made  a  specialty  of  it.     To-day  there  is 
hardly  a  leading  banking  house  which  does  not  engage 
in  foreign  exchange  business  and  hardly  a  foreign  ex- 
change manager  who  is  not  doing  some  sort  of  a  com- 
mercial letter  of  credit  business.     At  a  point  like  Xcw 
^'ork,  for  instance,  there  has  been  a  complete  change 
within  ten  years  in  the  personnel  of  the  banking  frater- 
nity M-hich  is  backing  the  operations  of  the  import  and 
export  houses.     The  private  banker  has  given  way  en- 
tirely to  the  institution.     Even  the  trust  companies  are 
engaging  in  this  business  on  a  large  scale. 

Commercial  credit  business  has  come  to  play  so  im- 
portant a  part  in  the  operation  of  the  up-to-date  bank, 
and  is  so  little  understood  even  by  many  of  those  well 

463 


Credit  No (Copy) 

£ Sterling 


GUARANTY  TRUST  COMPANY  OF  NEW  YORK 

Xew  York, , 


I 


I 

( 


I 


.191. 


To  the  Gdaranty  Trdst  Company  of  New  York, 
33  Lombard  Street, 

LOXDOX. 

Gentkmen: 

At  the  request  and  for  account  of 

ur  hereby  authorize 

or  any  other  parties  whose  drafts  you  may  be  directed  by written  order,  or  hy 

u-i.  to  accept  under  this  credit,  to  value  on  you  at for  any 

sum  or  sums  not  exceeding  in  all 

Pounds  Sterling  (say  £ Sterling)  to  be  used  as may  direct 

for invoice  cost  of 

to  be  purchased  for  account  of 

and  to  be  shipped  to  a port  in  the  United  States 

The  Bills  mu^t  be  dravm  in 

prior  to  the  first  day  of 

and  advice  thereof  given  to  you  in  original  and  duplicate,  such  advice  to  be  accom- 
pnnird  by  Bill  of  Ijiding  filled  up  to  order  of  the  Guaranty  Trust  Company  of 
-Vcu'  York  (with  copy  of  invoice)  for  the  property  shipped  at  above. 

All  the  Bills  of  Lading  issued,  except  one  sent  to  us  by  the  vessel  carrying  the 
cargo,  and  one  retained  by  the  captain  of  the  said  vessel,  are  to  be  forwarded 
direct  to  yon.  Copy  of  invoice,  properly  ceHified  by  the  U.  S.  Consul  to  be  for- 
warded to  us  by  the  vessel,  also  advice  of  each  Bill  drawn. 

And  we  hereby  agree  with  the  drawers,  endorsers,  and  bona  fide  holders  of 
Bills  drawn  under  and  in  compliance  with  this  credit,  that  the  same  shall  be  duly 
honored  on  presentation  at  your  office  in  London. 

We  are.  Gentlemen, 

Your  obedient  .servants. 
Guaranty  Trust  Company  of  New  York, 
by 

Manager. 

N.  B.  Bills  drawn  under  this  credit  must  be  marked  Drawn 
under  Guaranty  Trust  Company  of  New  York 

Letter  of  Credit  No dated 

for£ 

Insurance  in  order  at 


491 


.191... 


Xew  York,. 


191... 


Tnthe 


GUARANTY  TRUST  COMPANY  OF  NEW  YORK 

(irntlcmen: 

Hating^  rccHved  from  you  the  Leltrr  of  CredU  of  which  a  true  copyuonthe 
nihrr  side,  ^^hcreby agree  to  it.  terms, and  in  conmdcration  thereof  Jj^^  agree  with 
you  to  provide  in  New  York,  tu^lve  day.  preinous  to  the  Maturity  of  the  Bills 
riran-n  in  virtue  thereof,  mfflcicnt  funds  in  cash,  or  in  BUls  on  Lo,uion,  satis- 


me 
us 


,  to  meet 


Inrlory  to  you,  at  not  cscrrding  sixty  days'  sight,  and  endorsed  by 

'"  '"•'""^"'  "/""'  "'""'  ■-■'''  prrcent.  commission  and  interest 

as  hereinafter  pror-ided,  and  ^  undertake  to  insure  at  ^^  expense,  for  your  benefit, 
n,mnst  risk  of  Fire  or  Sea,  all  property  purchased  or  shvpped  pursuant  to  said 
Later  of  Credit,  in  Companies  satisfactory  to  you. 

„.^  agree  that  the  title  to  all  property  which  shall  be  purchased  or  shipped  under 
t>>e  said  credU,  the  bills  of  lading  thereof,  th.  polices  of  insurance  thereon  and 
tl'c  rrhole  of  the  proceeds  thereof,  shaU  be  and  remain  in  you  until  the  payment 
of  ,he  bais  referred  to  and  of  all  sums  that  may  be  due  or  thai  may  become  due  on 
«">/  bills  or  otherwise,  and  until  the  payment  of  any  and  all  oth^r  indebtedness 
and  liability  now  existing  or  now  or  hereafter  created  or  incurred  by  ^  to  you 
"n  any  and  all  other  transactions  vow  or  hereafter  had  with  you,  withluthority 
t'>  take  possession  of  the  same  and  to  dispose  th^eof  at  your  discretion  for  your 
nunbursement  as  aforesaid,  at  public  or  private  sale,  .mlhaut  demand  or  notice. 
o'ld  to  charge  aU  expenses,  including  commission  for  sale  and  guarantee. 

Should  the  market  value  of  .^id  merchandise  in  New  York,  either  before  a 
ollrr  Us  arrival,  fall  so  that  the  net  proceeds  thereof  (all  expenses,  freight,  duties. 
rlc,  being  deducted)  would  be  insufficient  to  cover  your  advances  there  again* 
-i'h  commission  and  interest.  ^  further  agree  to  give  you  on  demand  any  further 
-purity  you  may  require,  and  in  default  thereof  you  shall  be  entitled  to  sell  said 
'•"rrhandi^  forthwith,  or  to  seU  "to  arrive,-  irrespective  of  the  maturity  of  the 
acceptances  under  this  CredU,  ^  being  held  responsible  to  you  for  any  deficit 
""'''   u.   ^nd   and  obluje  Jl^y^^^   to  pay  you  in  cash  on  demand. 

It  is  understood  that  in  all  payments  made  by  -/  to  you  n.  the  United  States, 
C-MII-.T)  ^ 


ilir  Pound  Strrlitifj  fhnll  br  rnlnilatrd  at  tlw.  current  rate  of  rrc'innqr  for  linnkcrt 
mih  in  All/'  York  on  London,  rxixting  at  the  time  of  urttlrmrnt,  and  that  tnterr-.t 
shall  hr  charged  at  the  rate  of  five  per  cnil.  per  annum,  or  at  the  current  Bank  of 
England  rale  in  London  if  ahoir  five  ;x  r  cent. 

Should  anticipate  the  jxiifmrnt  of  an;/  jtorlinn  of  the.  amount  payable, 
interest  is  to  be  allowed  at  a  rate  one  per  cent,  under  the  current  Bank  of  England 
rate. 

In  ca.<<e  should  hereafter  desire  to  hare  this  credit  confirmed,  altered  or 
extended  h;/  cable  {which  will  be  nt  "■'  r.i7r«.<:r  and  ri'.<A),  ,  hereby  agree  to  hold 
you  harmless  and  free  from  rrsjKmsihUihj  from  errors  in  cabling,  whether  on 
the  part  of  yourselves  or  your  Agents,  here  or  elsewhere,  or  on  the  part  of  tha 
cable  companies. 

This  obligation  is  to  continue  in  fnrcr.  and  to  be  applicable  to  all  trans- 
actions, noticiihstanding  any  change  in  the  r '(//i/)o.*i7io«  of  tlie  firm  or  firms,  parties 
to  this  contract  or  in  the  user  of  Ihi.s  credit,  uhether  such  change  shall  arise  from 
the  accession  of  one  or  more  new  partners,  or  from  the  death  or  secession  of  any 
partner  or  partners. 

It  is  under.itood  and  agreed  that  if  the  documents  representing  the  property 
for  u-hich  the  said  Credit  has  been  issued  are  surrendered  under  a  trust  receipt, 
collateral  security  satisfactory  to  the  Company,  .'•uch  as  stocks,  bonds,  tcarehou-^e 
receipts  or  other  security,  shall  be  given  to  the  Company,  to  be  held  until  the  terms 
t>f  the  credit  have  been  fully  satisfied  and  subject  in  every  respect  to  the  conditions 
of  this  agreement. 

It  is  further  understood  and  agreed  in  the  event  of  any  suspe.vnon,  or  failure, 
or  assignment  for  the  benefit  of  creditors  on  "'^  part,  or  of  the  nonpayment  at 
maturity  of  any  acceptance  madeby^,  or  of  the  nonfulfillment  of  any  obliqa- 
Hon  under  said  cndit  or  under  any  other  credit  issued  by  the  Guaranty  Trwi 
Company  of  X<w  York  on  •'  account,  or  of  any  indebtedness  or  liability  on 
our  '"""'  '"  ^""'  ""  obligations,  acceptances,  indebtedness  and  liabilities  whai- 
scever  shall  thereupon,  at  your  option  then  or  thereafter  exercised,  without  notiet, 
mature  and  become  due  and  payable. 


466 


FORKIGX  COMMERCE 


4(>7 


informed  in  most  other  departments  of  banking,  that 
it  is  well  worth  while  to  pause  and  look  carefully  into 
the  rnncii)les  on  which  the  business  is  grounded.  A 
(i(  scription  of  all  the  various  forms  in  which  it  is  being 
M.. iked  would  require  a  volume  in  itself;  but  there  is 
one  main  operation  around  which  the  system  is  built,  a 
clear  understanding  of  which  will  make  it  easily  possible 
to  grasp  the  more  complicated  forms  of  the  business. 

im.  Commercial    credit   finance    illustrated.— Take 
the  commercial  credit  business  as  it  applies  to  the  im- 
|)oit  of  merchandise,  say,  from  the  Far  East  to  New 
York.     Suppose  a  Xew  York  house  to  have  bought  a 
hundred  cases  of  bristles  in  China,  How  can  the  trans- 
action be  financed  and  the  paym-  it  effected?     On  clos- 
ing the  contracts  for  the  bristles  by  cable,  the  first  thing 
the  importer  would  do  would  be  to  go  to  his  banker  and 
uet  him  to  issue  a  commercial  letter  of  credit  to  fit  the 
terms  of  the  contract.     Such  a  letter  of  credit  would 
he  addressc:'  to  some  bank  in  London  and  would  au- 
thorize that  bank  to  "accept"  the  four  months'  sight 
•lial't  of  the  sellers  of  the  bristles  in  China,  up  to  a 
ceitain  amount  and  under  certain  conditions.     These 
conditions,  having  to  do  with  the  attaching  to  the  drafts 
of  the  bills  of  lading,  insurance  certificates,  etc.,  are  all 
set  forth  in  the  credit. 

The  banker  in  London  having  been  duly  advised  of 
the  credit  on  him  that  has  been  issued,  the  letter  of  credit 
itself  would  be  sent  out  to  the  seller  of  the  goods  in 
C  hina.  The  latter  would  then  go  ahead  with  the  ship- 
nient.  First,  the  bristles  would  be  insured  and  a 
certificate  to  that  effect  received  from  the  insurance  com- 
pany. Next  they  would  be  put  aboard  ship  and  a  cer- 
tificate to  that  effect  (bill  of  lading)  received  from  the 
steamship  company.     Having  these  documents  in  his 


4ns 


FORKKiN   1,X('IIAN(;K 


possession  the  seller  of  the  hristles  would  next  draw  a 
hill  of  exchange,  in  pounds,  on  the  London  hank  men- 
tioned in  the  credit,  the  draft  heing  at  four  months'  sight 
or  six  months'  sight,  as  set  forth  in  the  credit.  To  this 
draft  he  would  pin  the  bill  of  lading  and  the  insurance 
certificate,  and  then,  taking  the  letter  of  credit  with  him, 
he  would  go  to  the  local  bank  to  sell  the  draft,  get  his 
money,  and  thus  close  the  whole  transaction  so  far  as 
he  is  concerned. 

305.  Part  London  plays. — Just  at  this  point  should 
be  mentioned  the  reason  wh)^  London  was  brought  intj 
the  transaction  at  all— why,  in  fact,  the  seller  of  the 
goods  did  not  draw  direct  upon  the  buyer  in  Xew  York. 
The  explanation  is  simply  this:  in  the  first  place,  be- 
cause a  draft  drawn  on  some  small  New  York  mer- 
cantile house  would  not  be  readily  negotiable  out  in 
China;  in  the  second  place,  because  a  draft  in  dollars 
drawn  on  a  banker  in  Xew  York,  no  matter  how  good 
its  standing,  would  be  but  little  better  by  reason  of 
there  being  no  market  in  the  United  States  in  which 
such  drafts  can  be  discounted. 

Having  drawn  his  sterling  draft  for  the  full  value 
of  the  merchandise,  the  seller  of  the  goods  takes  the 
draft  to  hi  bank,  shows  the  letter  of  credit  which  gives 
him  the  authority  to  draw,  and  turns  it  into  local  money. 
The  bank  is  glad  enough  to  take  the  draft.  Exchange 
on  London  is  always  in  demand  and  most  of  the  local 
banks'  business  consists  in  buying  bills  of  exchange  just 
of  this  kind.  So  the  shipper  of  the  merchandise  takes 
his  money,  and  is  finished  with  the  transaction. 

At  this  point  in  the  operation  the  merchandise  has 
been  sent  oif  on  a  slow  steamer  to  Xew  Y'^rk  and  the 
hill  of  lading  and  the  four  months'  sight  draft  on  Lon- 
don, representing  the  value  of  the  goods,  is  in  the  hands 


FOREIGN  COMMERCE  40;) 

"■•■  liie  local  bank.  The  latter  now  loses  no  time  in  send- 
m^  off  this  draft  (pinned  to  it  is  the  hill  of  lading)  to 
Louilon,  m  order  that  the  draft  mav  be  "accepted"  by 
IIk"  hank  on  which  it  is  drawn. 

For  the  sake  of  clearness  suppose  the  draft  to  be 
•Iniwn  on  the  London  City  and  .Alidland  Bank.     A 
month  passes,  and  one  day  the  draft  is  presented  for 
'acceptance."     Detachin|r  from  the  draft  the  bill  of 
lading  and  the  insurance  certificate,  the  cashier  of  the 
I^ondon  City  and  Midland  Bank  writes  across  the  face 
of  the  draft,  "Accepted,  Payable  June  23."     He  gives 
the  draft  back  to  the  man  who  brought  it  in.     He  keeps 
the  hill  of  lading  and  the  insurance  certificate.    June 
'2'M  .s  four  months  off.     The  accepted  bill  of  exchange 
may  be  discounted  and  rediscounted  a  dozen  times  be- 
tween now  and  thtn  but  the  cashier  of  the  London  City 
and  Midland  Bank  has  no  interest  in  what  happens  to 
i.e  hill  or  where  it  goes.     All  he  knows  is  that  in  exactly 
lonr  months  that  bill  of  exchange  will  fall  due,  and 
conin.g  out  of  somewhere,  will  be  presented  at  his  wicket 
i  or  payment. 

m\.  Value  of  implicit  //-M^f.-Meantime  the  slow 
f  "eighter  ,s  steadily  carrying  the  goods  toward  New 
^  ork.  and  as  it  is  impossible  for  anyone  to  get  them 
<".t  of  the  ship  without  the  bill  of  lading,  the  cashier 
"'  the  London  City  and  Midland  Bank  loses  no  time  in 
sending  the  bill  of  lading  to  his  banking  correspondent 
n.  Aew  York  who  originally  issued  the  credit.     From 
tins  time  on  the  London  banker  is  unprotected.     He  has 
i;nt  his  name  on  a  bill  which  obligates  him  to  pay  it  in 
l-'-r  months;  and  relying  solely  on  the  good  faiih  and 
s..l^ency  of  h,s  New  York  correspondent  has  sent  the 
sl'.pp.ng  documents  to  him.     In  a  business  which  in- 
vnlves  such  an  operation  as  this  it  may  be  readily  imag- 


/ 


/ 


470 


FOREIGN  KXCIIANT.K 


iiied  liow  intimate  the  relations  must  be  between  tli 
bank  that  issues  the  eredits  in  New  York  and  the  baiil 
in  London  on  which  tliey  are  issued.  No  bank  in  Lon 
don  wouUl  ever  a^ree  to  "accept"  bills  unless  it  ha: 
the  most  implicit  trust  in  its  New  York  corresponden 
and  was  sin*e  that  before  the  four  months  were  up  anc 
the  bill  came  due  the  necessary  remittance  would  arriv< 
from  New  York. 

Before  going  on  with  the  transaction  and  seeing  hov 
the  goods  arrive  in  New  York  and  are  finally  deliv 
ered  into  the  hands  of  the  buyer,  it  is  worth  while  tc 
note  what  the  usual  relations  are  between  the  issuer  ol 
a  commercial  credit  and  the  bank  in  Europe  on  whicli 
the  credit  is  drawn.  Very  often  it  happens  that  a  New 
York  bank  issues  credits  on  its  own  branch  in  London, 
as  for  instance  the  Guaranty  Trust  Company  of  New 
York  on  its  London  office.  Then  again  a  great  deal 
of  the  business  is  transacted  on  joint  account  both  as 
to  risk  and  commission  realized — in  which  case  the  rela- 
tionship has  to  be  very  close.  Lastly,  credits  are  issued 
strictly  for  a  consideration — that  is  to  say,  the  banking 
house  of  John  Jones  and  Company  in  London  being 
satisfied  that  the  banking  house  of  John  Smith  and 
Company  in  New  York  is  all  right,  agrees,  for  a  stipu- 
lated commission,  to  "accept"  drafts  drawn  under  John 
Smith  and  Company's  credits  up  to  a  certain  amount. 
Any  good  bank  in  the  L^nited  States  can  easily  make 
such  arrangements. 

307.  Banker's  only  security. — Going  back  now  to  the 
typical  transaction  whose  course  we  have  been  follow- 
ing, let  us  assume  that  the  bristles  have  arrived  in  New 
York  and  that  the  bill  of  lading  has  been  received  by 
the  New  York  banker  who  issued  the  credit,  together 
with  advice   from  his  London   correspondent  of  the 


TRUST  RECEIPT. 


t 


(rOB    DEUVERT    TO    PCRCBABER.) 

RECEIVED  from  the  Gcara.vty  Thvst  Co.  op  New  York  the 
following  goods  and  nimhundi..-.  Ih.ir  i.ro,,..rly.  specified  in  the  Bill  of 

lading  per ^  j^^^ 

marked  and  numbered  as  fuUowv: 


1 


a 


1 


same. 


in  trust 


In  trust  to  deliver  the  same  to 

who  have  purchased  the  same  for 

payable  in 

and  to  obtain  from  the  purchaser  the  proceeds  of  the  sale  of  the 

In  consideration  of  the  delivery  of  said  goods  to  |  .  "^ 
f     I      ;  ^    "^    J 

as  above,  |  .^^   |  agree   to  deliver   them   immediately   to  the  said 

purchasers  and  to  collect  th,-  proceeds  of  sale,  and  immediately  deliver 
such  procecls  to  the  Guaranty  Trc st  V,k  of  New  York  in  whatever 
form  collected,  to  be  applie.l  by  them  against  the  acceptances  of  the 
Guaranty  Trust  Co.  of  New  York  on  i  .  ""^ 


°^  \ i"  account,  under  the 

I,   our 

my 


terms  of  Letter  of  Credit  No issued  for  ^ I  account, 

our   J 
r   mine 


and  to  the  payment  of  any  other  indebtednesi 
Guaranty  Trust  Co. 


oi  \ Mo    the 


>Ew  York  City.  N.  Y 
471 


I,    ours 


#7 


I 

s 
■i 

{ 

} 


York.     It  is  ,in.loMt<M..l.  howpver,  thnJ  if  sii.h  procercU  Ijo  in  notes  or  bi 
recciviil.|.>.  Ihoy  hIuII  not  Ik>.s<,  Mpplio.l  unlil  p:.i.|,  hut  with  lilK-rty  meanwh 

to  lb-  (luAHx.vrYTiusrCo.  ofNkw  VoKK  lo  m-U  ..r  .Iwioiint.  and  so  app 
■et  pnicccds. 

Tho  (U.MtvNTY  Ti.is,T  (\>.  OK  \nv  York  may  at  any  time  oanrel  tl, 
trust,  and  they  may  tako  i>...s.sos,si„„  „f  sai.l  g,H,ds  until  the  .same  have  \m 
delirered  to  sai.i  pnnhas,.rs  an.l  th.-  pr»<(v.l.s  .,f  sale  rireived  fmm  ther 
and  th..r..after  ,.f  su.h  p..,,....!-..  wherever  the  8aid  g.HMJs  ami  proceeds  ,m 
then  Ik.'  found,  and  in  (lie  event  ..f  any  .sus|R.n.ion  or  faih.re  or  a««igmnei 

my 


forthel)enefit  of  ereditoi-son 


t)ur 


I)art  or  of  the  non-fu!fdIment  of  an 


under  sai.l  credit,  or  any  other  credit  issued   l)y   the  Cuaraxt 


obligation  or  of  tlie  non-payment  at  maturity  of  any  aceeptance  made  b 
f   me 

TrustCo.okXkw  VoHKon  j    '"^  I    account,  or  of  any  indebtedness  o 
,  ,  I  our  J 

f  my 

1  our  j   '""'^    '"    "'*"'"■    *'"    •^'^''K''*'°n-^'    a'-ceptances.    indebtedness,    an, 

liabilities  whatsoever  shall  thereupon  (with  or  without  notice)  mature  am 
become  due  and  payable. 


Dated. 


.101 


26990 


472 


TRUST  UEfEIPT. 


KF(T-IVEI)  from  the  Guaranty  Tmrni  Co.  of  Nkw  Yohk  the  foUowin* 
f,u,,U  HI..I  menhandwe.  their  property,  Hpeiifted  in  the  BUI  of  LadiniT? 

^  '^  Dated 

luaiked  and  numbered  u  followa:  


anrl,  in  consideration  thereof, 


(    we    J 


HEREBY  AOREE  TO  HOLD  SAID  OOOD8  IN 

TKf  HT  for  them,  and  as  their  pro^rty.  with  lif)erty  to  sell  the  .same  for  their 
:..<ount.  an.  further  agree,  in  fa«e  of  sale  to  hand  the  proceeds  to  them  to 
api.lyaKu.n.stthea..eptam.e8of  thoCJtARANTY  Thcst  (VoTxew  Won 


our 


account,  under  the  terms  of  thcl^tter  of  Credit  \o issued 


our 
mine 

ours 


account  and  for  the  payment  of  any  other  indebtedness  of 
to  the  Guaranty  Trust  Co.  of  New  York. 

benefit  of  creditors,  on  j  -^  |  part,  or  of  the  non-fulfilhuent  of  any  obU- 
gat  ion,  or  of  the  non-payment  at  maturity  of  any  acceptance  made  by  |  ~  | 


u.i.ler  said  credit,  or  under  aiiy  other  credit  issued  by  the  (;uahkvtv  Thist 
my   j 

account  or  of  any  indebtedness  on 


Cc.  OF  New  York  on 


our 


my 


part  to  them   all  obhgatiora,  acceptances,  indebtedness  and  liabilities  wha- 
-.•^er  shall  thereupon  (with  or  without  notice)  m^ure  and  b^tome  due  and 

'  my  1 

\  hanils  shall  be  fully  insured  against 

our  I 


I.ayable.    The  said  goods  while  in 
ln>-<  by  fire. 

Dated,  New  York  City, jgj 

(Signed) 

£ Stg. 


47.3 


I 


Jij   { 

i 


i   i 


5 1 


TRU3T  RECETFT. 


(DocvMENTB  roK  Warbhoo«ino.) 


RECEIVED  from  ilu-  GtAKAsir   Thuar  Co.  or  New  York  BUI 
Lading    pt-r  ilated 

for  the  following  good*  and  luercbuidiate,  their  property,  marked  and 
bered  tu  followa: 


nu 


imported  under  the  terms  of  Utter  of  Credit  No ,  issued  by  the 

for  i  j  account,  the  sai.l  Hill  of  Lading  to  be  used  bv  I 

«"•■  '  ^     us 


fort! 


sole  purpose  of  entering  the  al)ove  described  property  at  the  United  State 

Custom  House  at  the  Port  of ^^^  ^ 

storing  the  same  in  the  name,  an.l  as  the  property,  of  the  said  the  Guaii.4nt 

Trust  Co.  of  New  Yokk.  and  subject  only  to  their  order,  J .  hereb 

agreeing  to  so  store  the  said  property  an.l  to  hand  the  storage  receipt  forth 
same  to  t^he  .said  the  Guahanty  Tkist  Co.  ok  Xkw  York,  when  obtained. 

I  We^  I  ""^^  '^'""*^*^  ^°  '""'^  ""*"'^  '*'*''*  P^Perty  against  fire,  the  losi 
if  any.  payable  to  said  the  C.uauaxty  Tkl-st  Co.  of  New  York,  and  to  ham 
to  them  the  policies  of  insurance  thereon. 

Dated 191 


(Signed).. 


474 


FOREIGX  COMMERCE 


475 


ariiount  of  the  draft  drawn  and  its  maturity.  The  next 
stij)  is  to  put  the  bristles  into  tlie  iniijorter's  jjossession 
Hut  by  doin^  so,  the  banker  is  doin^  nothing  less  than 
liaiuling  over  the  only  security  he  has.  How  can  he  let 
\\\v  irnj)orter  have  the  bristles  and  still  remain  protected 
liiruself? 

He  cannot,  unless  the  "trust  receipt"  he  receives  when 
lie  ^rives  up  the  bill  of  lading  to  the  importer  can  be 
called  protection.  The  "trust  receipt"  is  simply  a  paper 
sio^ued  by  the  importer  stating  that  he  has  received  the 
inerchundise  and  that  he  will  sell  the  same  and  apply 
the  proceeds  toward  paying  off  the  four  months'  sight 
draft  before  or  at  maturity.  Most  trust  receipts  spec- 
ify that  the  merchandise  is  to  be  kept  separate,  ear- 
marked as  it  were,  and  that  the  proceeds  are  to  be  kept 
strictly  distinct  from  the  firm's  other  assets  and  handed 
over  to  the  banker  as  the  bristles  are  sold. 

Having  the  actual  merchandise  in  his  hands,  the  im- 
porter is  now  in  a  position  to  sell  it  and  begin  to  make 
pre-payments  to  the  banker  who  issued  him  the  credit. 
As  these  are  received  by  the  banker  he  sends  them  to  the 
London  bank  which  holds  them  against  the  maturity 
of  the  bill  it  accepted.  Presumably,  before  the  four 
months  are  up,  the  bristles  will  all  have  been  sold  and 
enough  money  out  of  the  proceeds  remitted  to  London 
to  cover  the  whole  amount  of  the  maturing  draft. 
AN'liat  is  left  constitutes  the  importer's  profit. 

308.  Benefits  to  importer. — It  has  been  worth  while  to 
set  down  the  whole  practical  course  of  one  of  these  typi- 
cal commercial  credit  operations  in  order  that  there  may 
be  no  confusion  in  dealing  with  the  theoretical  side — 
tlie  reason  why  the  various  parties  go  into  such  transac- 
tions and  the  benefits  each  gets  out  of  it.  Take  first 
the  importer.     It  is  all  a  matter  of  credit  with  him;  if 


ltd 


FOREKJN  r:X(  IIAN'GE 


i 


he  can  get  a  bniiker  to  ^ive  him  a  coimiicrclal  lettci 
credit,  lie  eaii  hrin^  in  any  <|uantitv  .)l'  inereliaml 
have  anywhere  up  to  four  months  to  sell  it  in.  and  ne 
have  to  put  up  a  doUar  of  his  own  money.  All  it  c< 
him  is  a  commission  on  the  amount  of  the  drafts  dra^ 

The  regular  commission  is  one-(iuarter  i)er  cent 

each  thirty  days  of  the  life  of  the  draft  drawn.     Th 

if  the  drafts  are  drawn  at  sixty  days'  si^ht,  the  merclu 

pays  a  conmiission  of  two  times  one-ijuarter  per  ce 

which  equals  one-half  jier  cent.     I  f  the  draft  runs  fc 

n  *nths,  or  120  days,  the  commission  would  be  fc 

times  one-quarter  per  cent,  which  ecjuals  one  per  cei 

This  is  the  regular  conunission.     As  may  J)e  imaKim 

it  is  changed  in  all  sorts  of  ways  as  a  matter  of  indivi 

ual  negotiation.     On  coffee  credits  there  are  sevei 

hanks  in  Xew  York  now  doing  the  business  at  thre 

eighths  per  cent  for  ninety  days'  sight  drafts— whi^ 

is  exactly  one-half  the  regular  commission.     So  keen 

the  competition  that  there  is  one  large  bank  which 

doing  six  months'  business  at  only  one-half  per  cer 

Such  business  is  ruinous,  a  commission  of  that  kind  beiri 

no  fair  compensation  for  the  risk  taken. 

309.    Benefits  to  exporter.— ^o  much  for  what  the  in 

porter  gets  out  of  the  transaction.     How  about  the  e? 

porter  in  China?    As  has  been  shown,  he  has  been  abl 

to  make  a  sale  on  a  four  months'  credit,  and  to  get  h 

money  without  a  day's  delay  and  put  himself  in  shaj] 

for  the  next  transaction.     Of  course,  when  he  took  hi 

four  months'  sight  sterling  draft  to  his  banker  to  sel 

he  did  not  get  as  high  a  rate  of  exchange  as  if  he  hai 

had  a  sight  draft  to  sell,  the  difference  representing  th 

discount.     But  that  was  allowed  for  in  the  piice  Ik 

originally  quoted  for  the  goods.    What  counts  witl 


I'OUKKiN  (O.M.MKHCE 


477 


liiiii  is  that  he  hus  iiiudc  the  suit',  Ims  received  his  money, 
.'iiiii  is  ready  for  the  next  transaction. 

.'HO.  liaukir'n  com mimon.— As  for  tlie  two  bankers, 
one  in  New  York  and  one  in  London,  their  part  in 
tlu  transaction  has  In-en  influenced  sininlv  bv  the  desire 
to  make  a  commission.  Both  of  them  took  a  certain 
risk,  to  k'  sure,  Init  crechts  of  this  kirxl  are  never  issued 
ixirpt  to  entirely  trustworthy,  parties.  And  as  a  mat- 
te r  of  fact  neither  banker  has  had  to  put  up  any  real 
iiioiity.  The  one  in  New  York  has  had  to  stand  respon- 
sihlc  for  the  importer  to  whom  he  issued  the  credit,  and 
the  one  in  London  has  had  to  obligate  himself  by  "ac- 
(•c|»tin^"  the  drafts— putting  his  name  on  commercial 
paper— but  no  one  has  had  to  advance  any  actual  money. 
'I'lif  real  money  that  the  shipper  in  China  received  was 
based  entirely  on  the  credit  of  the  banks  concerned  in 
the  operation. 

I'or  which  reason  it  appears  that  as  long  as  a  bank 
here  can  get  a  bank  in  London  to  "accept"  drafts  drawn 
mider  the  American  bank's  letters  of  credit,  there  is 
ahnost  no  limit  to  the  volume  of  business  it  can  do. 
Aid  en  a  siiiall  rate  of  commission  will  return  big 
profits.  There  are  a  number  of  banks  and  bankers 
doing  business  in  Xew  York  for  whom  their  foreign  cor- 
lespondents  regularly  keep  running  acceptances  amount- 
in.;  to  $5,000,000.  A  fair  average  net  profit  to  the  bank 
issuing  the  credit  would  l)e  called  14  per  cent,  turned  over 
four  times  a  year,  so  that  a  bank  with  $5,000,000  of 
aeeeptances  constantly  running  abroad  would  stand  to 
make,  say,  $50,000  a  year  in  commissions  without  hav- 
ing put  up  a  dollar  of  capital. 

A  l)ook  might  be  written  on  the  various  forms  of 
commercial  credit  business  being  transacted  but  it  would 


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■pimbasqns  puv'ifM^  msx  fo  Kuvdutoj  jsruj^  finitutmQ  ay;  oj  pajojgjj 
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479 


4sn 


FOREIGX  EXCHAXGE 


[I    i 


be  only  a  more  detailed  description  of  operations  whos( 
tlieory  is  tlie  same  as  the  one  I  have  attempted  to  out 
line.  \\'hether  the  merchandise  in  question  is  bristle; 
and  comes  from  China,  or  whether  it  is  coffee  and  come; 
from  Brazil,  makes  little  difference  so  far  as  the  bank 
ing  end  of  the  transaction  is  concerned.  Nor  does  il 
make  any  difference  if  the  article  happens  to  be  sili< 
or  dry  ^oods  imported  from  France,  or  if  tlie  credil 
directs  that  the  drafts  shall  be  drawn  in  francs  on  some 
bank  in  Paris  instead  of  pounds  on  some  bank  in  Lon- 
don. All  these  are  ramifications  of  the  same  thing. 
They  all  come  back  to  the  one  central  idea  that  the 
banker  turns  over  not  his  money  but  his  credit  to  the 
importer,  enabling  the  importer  to  do  safely  a  very 
much  larger  amount  of  business  than  he  could  do  on 
his  own  limited  capital. 

311.  An  aid  to  business. — Through  the  utilization  of 
commercial  letters  of  credit,  indeed,  more  than  one  small 
firm  has  remarkably  built  up  its  business.  The  writer 
happens  personally  to  know  of  the  case  of  a  small  im- 
porting firm,  which,  as  the  result  of  the  commercial 
credits  extended  to  it  by  a  big  trust  company,  became  a 
strong  concern  within  the  space  of  only  a  very  few 
years.  Had  the  men  at  the  head  of  this  firm  not  been 
able  to  convince  the  bankers  of  their  ability  and  integ- 
rity, they  would  never  have  been  able  to  obtain  the 
credits  and  must  have  been  content  with  much  slower 
progress.  But,  on  the  other  hand,  had  there  been  no 
such  system  existent,  no  amount  of  abihty  could  have 
built  up  the  business  in  >.o  short  a  time. 

312.  Grozcth  of  commercial  credit  and  facilities.— 
Owing  to  the  large'  number  of  bankers  now  engaged 
in  commercial  credit  business  and  the  fact  that  even 
the  big  banks  are  willing  to  open  little  credits  of  £100 


FOREIGN  COMMERCE 


481 


to  £200,  the  use  of  these  facilities  by  importers  has 
hecoint'  very  general.  It  is  a  common  thing  for  a  bank 
to  ^rra:it  an  importer  with  resources  of  $100,000  a  letter 
,,i  credit  for  £20,000,  thus  enabling  him  to  double  his 
business.  And  it  is  to  this  that  the  ^reat  increase  in 
our  foreign  trade  during  the  past  ten  years  is  undoubt- 
edly due.  Where  importing  is  made  so  easy  there  will 
be  plenty  of  people  who  want  to  engage  in  it. 

\V'^hat  influence  does  this  mass  of  credit  exert  on 
tiie  stability  of  the  commercial  structure?  Is  there 
any  ground  for  the  mistrust  of  the  old-line  importer 
wiio  thinks  that  the  merchant  should  use  his  own  cap- 
ital and  not  the  banker's?  Very  Httle — that  was  shown 
beyond  doubt  by  the  panic  of  1907  and  the  bad  times 
wjiich  followed.  Failures  among  importers  occurred 
but  they  were  comparatively  few — certainly  nothing 
like  what  was  feared.  Bankers  lost  some  money  on 
commercial  credits  during  that  time  but  the  amount 
was  not  very  great.  The  merchandise  imported  by 
any  but  the  strongest  houses  is  usually  all  sold  before 
tiie  letter  of  credit  is  even  applied  for;  and  so,  as  long 
as  the  importer  is  honest,  the  banker  takes  little  risk 
of  not  getting  his  money. 

The  commercial  credit  business  as  it  has  developed 
(luring  the  past  few  years  has,  in  fact,  become  an  in- 
tegral part  of  our  banking  system  and  is  growing  more 
and  more  important  all  the  time.  It  is  a  development, 
indeed,  which  is  a  long  step  toward  the  bringing  about 
of  those  ideal  relations  between  the  banker  and  the  bus- 
iness man  which  tend  to  use  the  accumulated  savings 
of  the  country,  not  for  speculation  but  for  carrying 
on  the  country's  legitimate  business. 


C— VIII— 31 


CHAPTER  IV, 

FOREIGN  EXCHANGE  AND  THE  INTERNATIONAL  SE 

CURITY   MARKET 

313.  The  three  classes  of  international  security  deal 
ings.— Out  of  Europe's  interest  in  American  enterpris 
and  constantly  growing  investment  in  American  se 
curities  arises  an  immense  volume  of  international  secu 
rity  dealings.  Estimates,  as  nearly  reliable  as  cai 
be  made,  place  the  amount  of  foreign-held  Americar 
securities  at  five  billion  dollars.  The  maintenance  aloiK 
of  such  an  investment  makes  necessary  dealings  whicl 
run  up  into  the  hundreds  of  millions  each  year,  afford 
ing,  as  well,  an  opportunity  for  speculative  and  arbi- 
trating operations  between  the  markets,  the  vast  exteni 
of  which  it  is  impossible  even  to  estimate. 

Security  dealings  between  our  own  and  the  foreign 
markets  resolve  themselves,  broadly  speaking,  into  three 
classes.  First,  there  is  the  business  arising  from  re- 
placement of  maturing  investments  and  the  distribu- 
tion to  foreign  buyers  of  new  issues.  Second,  there 
are  the  great  operations  which  accompany  speculations 
of  an  international  nature;  cases,  for  instance,  where 
foreign  operators  or  banking  houses,  working  on  joint 
account  with  parties  here,  carry  large  lines  of  stocks 
or  bonds.  Third,  there  is  a  great  volume  of  dealings 
arising  from  the  never-ceasing  efforts  to  "arbitrage" 
between  various  markets — to  buy  something  in  one  city 
and  at  the  same  moment  turn  around  and  sell  it  in  some 
other  city  at  a  higher  price. 

482 


INTERNATIONAL  SECURITY  .AIARKET       483 


:Ui.  Replacement  of  maturing  investments.— Taking 
the  first  class  of  dealings,  it  readily  appears  how  great 
.1  volume  of  trading  originates  jolely  from  the  replace- 
ments of  r  aring  honds.  Of  the  five  billion  dollars  of 
America.  ,  held  abroad  a  considerable  part  consists 
of  stocks,  but  it  is  safe  to  sa,  V  ;:  rf.  leasL  two-thirds 
of  tlie  total  is  made  up  of  bonds.  Furthermore,  the 
^ntat  bulk  of  this  foreign  money  went  into  our  Amer- 
ican bonds  a  number  of  years  ago  at  the  time  when  the 
development  of  the  West  and  the  construction  of  its 
raihvays  was  being  so  largely  carried  on  with  foreign 
cai)ital.  Each  year  a  larger  proportion  of  these  bonds 
is  coming  due,  and  where  renewals  are  not  made,  the 
way  is  opened  for  investment  in  something  else. 

American  banking  houses  closely  in  touch  with  their 
foreign  correspondents  know  just  about  what  securities 
their  friends  and  clients  on  the  other  side  hold.     The 
most  careful  watch  is  kept  upon  the  maturity  of  these 
investments,  and  offerings  and  suggestions  are  usually 
^^overned  by  what  the  house  here  knows  of  its  cor- 
respondents' liability  to  buy.     A  foreign  holder,  for  in- 
stance, of  Atchison  serial  debentures  which  run  off  in 
large  amount  during  the  next  few  years,  is  apt  to  have 
^reat  quantities  of  various  Atchison  issues  offered  him 
(luring  the  time  that  his  old  Atchison  bonds  are  ma- 
turing.    He  has  shown  preference  for  that  kind  of  a 
I'ond,  dealers  here  reason,  and  so  that  is  the  kind  of  a 
I'oiul  he  is  apt  to  want  in  substitution. 

Knowledge  of  what  investments  are  held  by  big  cap- 
italists abroad  is,  of  course,  an  extremely  valuable  asset 
of  the  bond  dealer  here  and  is  very  hard  to  obtain. 
There  are  many  cases  where  the  foreign  and  domestic 
tirnis  are  so  close  to  each  other  that  the  foreign  firm 
Mmply  sends  lists  of  what  it  holds  and  what  its  clients 


48-* 


FOREIGN  EXCHANGE 


;s 

1 1 


I 

i 

i! 
i! 

ii 


own,  but  more  often  the  banker  here  gets  his  informi 
tion  from  the  coupons  which  are  regularly  sent  him  f( 
collection.  That  is,  of  course,  an  infallible  indicatio 
of  what  Ixinds  are  being  held  for  fixed  investment  an 
is  a  clew  which  the  shrewd  dealer  here  never  fails  1 
follow  up  and  use  for  all  it  is  worth. 

The  amount  of  new  American  securities  annuall 
sent  abroad  is  very  large.  JMore  and  more,  as  tli 
financial  relationship  of  our  own  and  the  foreign  mai 
kets  has  been  strengthened  and  developed  have  hanV 
ers  here  come  to  rely  upon  the  participation  of  Ihei 
foreign  friends  in  any  syndicates  which  they  go  intf 
It  has  always  been  the  case  that  when  blocks  of  firsi 
class  bonds  were  underwritten  by  powerful  interna 
tional  houses  here,  a  good  part  of  the  underwritin, 
was  for  bankers  on  the  other  side.  Now,  however,  i 
has  come  about  that  issues  brought  out  even  by  rela 
tively  unimpoitant  financial  interests  are  being  con 
tinually  offered  and  placed  on  the  other  side  in  local 
ities  where  American  bonds  not  so  long  ago  would  no 
have  had  any  market  whatever. 

315.  International  speculations. — Turning  to  the  sec 
ond  class  of  international  trading — speculative  opera 
tions  by  foreign  interests  in  our  market — it  appear 
that  dealings  of  this  kind  at  times  foot  up  to  an  enormou 
total.  There  are,  of  course,  countless  forms  in  whicl 
operations  of  this  kind  are  conducted,  but  they  an 
pretty  much  all  based  upon  the  principle  which  th( 
following  example  illustrates.  An  operator  or  bank 
ing  house  abroad  has  come  to  a  cable  agreement  witl 
its  American  representative  that  a  certain  stock  car 
be  profitably  bought.  The  amount  which  is  to  be  car 
ried  (joint  account,  usually)  is  fixed  upon  and  the 
American  firm  goes  ahead  and  buys  the  stock.     Bui 


inti:r.\ati()n\al  sfxuhitv  mahkkt      ^H^ 


Irislcad  of  imyin^'-  for  the  stock  out  of  its  own  capital 
()!•  hoirowiii^r  the  money  from  a  hunk,  the  American 
house  is  apt  to  raise  the  money  by  drawing  sixty  to 
uiiRty-day  bills  of  exchange  in  pounds,  marks,  or 
tV.iiics,  as  the  case  may  be,  upon  its  foreign  partner 
111  the  transaction.  These  "long"  bills  it  sells  in  the 
t M'hange  market,  using  the  dollar  proceeds  to  pay  for 
the  stocks  which  have  been  bought. 

i\s  the  case  then  stands,  the  stocks  have  been  bought 
and  are  beijig  carried  with  money  on  which  no  interest 
is  being  paid.  At  the  same  time  it  must  always  be 
ruTiembered  that  the  American  house  has  drawn  and 
thi'  foreign  house  has  "accepted"  ninety-day  bills  of 
( xchange,  and  that  in  just  three  months  the  holders 
<>r  the  bills  will  come  to  the  firm  on  which  they  are 
drawn  and  demand  payment.  By  that  time  the  Amer- 
ican iirni  must  have  sent  money  across  with  which  to 
imrt  the  maturing  bills. 

lint  suppose  that  the  parties  in  the  transaction  have 
not  hi.d  the  chance  or  have  not  seen  fit  to  sell  their  stock 
before  the  bills  of  exchange  come  due  in  Europe. 
Where,  then,  is  the  American  firm  going  to  raise  the 
money  to  send  abroad  to  its  correspondents?  By  "re- 
newing" as  they  call  it— selling  more  long  bills  and 
using  the  proceeds  to  send  across  to  retire  the  first 
set  of  long  bills.  Suppose  that  in  the  first  place  £lO,- 
000  of  ninety-day  bills  had  been  drawn  and  fell  due 
Xovember  30.  Then,  if  the  stock  had  not  been  sold, 
on  Xovember  30  the  American  house  would  draw£lO,- 
000  more  of  ninety-day  bills  and  use  the  dollar  proceeds 
to  buy  demand  exchange  to  send  to  its  foreign  cor- 
respondent. The  dollar  proceeds  of  £10,000,  "nine- 
ties," would,  of  course,  not  be  enough  to  buy  £10,000 
of  demand  exchange  the  same  day.    The  demand  ex- 


480 


FOREir.X  EXCHANT.E 


chancre  would  he  ai)t  to  cost  from  three  to  four  cci 
a  pound  stcrliii|r  ,n„,.e  tliau  could  be  realized  ou  the  n( 
set  of  "nineties,"  this  difference  representing  the  i 
terest  on  the  money. 

As  has  been  remarked,  intemational  si)eculative  o 
erations  in  stocks  are  of  an  infinite  variety  and  invol 
all  kinds  of  complicated  forei^rn  exchan^re  transactior 
Very  often  the  stocks  or  bonds  are  not  bou^dit  on  joii 
account  and  instead  of  being  "carried"  here,  are  drav 
against,  and  at  once  shipped  to  the  other  side.  Som 
times,  even  in  joint  account  transactions,  it  is  four 
better  to  ship  the  stocks  to  a  foreign  market  and  borro 
on  them  there.  Operations  of  this  sort,  however,  ai 
more  apt  to  come  under  the  first  class  mentionei 
AVhere  stock  is  bought  for  a  turn  the  whole  transactic 
is  likely  to  be  along  the  line  of  the  example  which  lu 
been  given. 

31  (J.  Internatimial  arhitragin^r.— Coming  now  to  tli 
third  class  of  international  security  dealings,  it  aj 
pears  that  out  of  the  maintaining  of  the  parity  o 
the  various  stock  and  bond  markets  arises  a  farg 
volume  of  dealings.  With  cable  facilities  develope 
as  they  are  now,  it  is  evident  that  it  is  impossible  fc 
stocks  in  which  there  is  any  broad  market  to  be  sellin, 
very  far  apart  on  two  different  exchanges.  Exper 
arbitrageurs  are  at  hand  in  every  market  constantl; 
receiving  cable  reports  from  other  markets  in  whici 
they  work,  and  their  operations  continually  tend  t 
bring  together  prices  and  keep  them  on  a  parity. 

Without  becoming  involved  in  the  intricate  detail 
of  arbitraging  between  stock  exchanges,  it  may  mereh 
be  said  that  on  account  of  the  difference  in  time  th( 
only  part  of  our  session  in  Xew  York  during  which  th( 
Loudon  market  is  open  is  between  10  and  11  o'clock  ir 


art; 


TNTERNATIOXAL  SECURITY  MARKET        487 

ifMinin^r.  During  that  time  the  same  active  stocks 
being  traded  in  on  both  exchanges  at  the  same  time. 
And  during  that  hour  there  are  a  number  of  houses 
with  direct  connections  at  each  end  of  the  cable  who  are 
watching  their  chance  to  shave  out  a  difference  of  any- 
thing from  an  eighth  of  a  point  to  a  point. 

317.  Value  of  ean  y  nezcs.—If  the  arbitrageurs  are  so 
keen,  why  is  thene  ever  any  difference  in  the  parity,  or 
a  chance  for  any  one  to  make  money?     Simply  because 
the  same  influences  affect  the  two  markets  differently 
and  news  often  reaches  one  market  before  the  other. 
Foreign  political  disturbances,  for  instance,  are  more 
likely  to  start  selling  movements  among  foreign  spec- 
ulative holders  of  American  stocks  than  among  specu- 
lators here.     ^Vhen  a  movement  like  that  begins  it  will 
be  easily  seen  where  the  arbitrageur's  chance  comes  in. 
Stock  is  being  pressed  on  the  foreign  market.     Realiz- 
ing that  fact,  he  gets  the  best  bid  here  and  deducting 
the  fraction  he  is  willing  to  make,  cables  the  bid  to 
the  other  market.     If  he  has  sized  up  the  movement 
right,  the  chances  are  that  his  bid  will  buy  the  stock 
and  that  he  will  be  able  to  make  the  difference. 

Strictly  speaking,  both  ends  of  an  arbitrage  trans- 
action are  closed  at  the  same  time  and  no  risk  is  taken. 
In  actual  practice,  however,  it  continually  h  ppens  that 
the  chance  to  do  a  good  stroke  of  business  presents 
itself  conditional  to  the  arbitrageur's  being  willing  to 
l)uy  or  sell  in  one  market  and  wait  a  few  minutes  before 
closing  the  other  end.  This  is  particularly  so  in  the  less 
active  stocks.  Frequently  it  happens  that  shares  of  this 
kind  are  offered  in  a  foreign  market  at  such  a  concession 
i'rom  the  last  price  here  that  the  operator  can  be  prac- 
tically sure  that  if  he  takes  the  stock  offered,  the  next 
bid  here  will  enable  him  to  get  out  at  a  .^ood  profit.     In 


4SS 


FORFJGN  EXriTAyCE 


i  ■  i 


I!  ^1 


i    '    \wm 

1 

■P^^^Wm   I 

f 

m  ^ 

f 

^BUk 

s 

"IB|»1 

3 

wS^ 

1 

^^JSm     i| 

i 

K     '^« 

\ 

V>    '.iM 

i 

i^^mi   11 

i 

T^      iW^ 

1 

'    1    /             '    .}'^B 

i 

!      ^B 

4.1 .1  -    L^!«: 

'    !■ 

B 

^''B 

!;|: 

Hi 


(Icalm^rs  of  this  kind  there  is  naturally  an  element 
risk  and  in  had  markets  eonsiderahlc  losses  sonietiii 
have  to  he  taken.     Success  in  that  kind  of  arbitra 
l)resupposes  great  skill  and  shrewdness  on  the  part 
the  operator. 

.•n8.  Arbitrage  /jro/?/#.— Straight  arbitrage  betwe 

two  stock  exchanges  is  a  more  or  less  exact  operatic 

much  more  so  than  the  great  amount  of  arbitragii 

in  bonds  which  is  going  on  all  the  time.     More  diffici 

to  put  through,  these  deals  are  far  more  profitable  th 

the  shaving  off  of  fractions  in  stocks.     And  realizii 

how  big  the  outside  market  for  American  bonds 

London  has  become,  many  prominent  houses  have  mi 

whose  sole  business  it  is  to  keep  in  touch  with  the  mark 

for  international  securities  in  Xew  York  and  Londc 

and  to  put  through  trades  between  the  two  markets. 

In  theory  the  idea  is  the  same  as  when  bonds  con 

into  the  Philadelphia  market  and  a  Philadelphia  hou 

offers  them  by  wire  in  New  York,  half  a  point  or 

point  higher.     In  actual  practice,  however,  the  case 

very  different,  for  the  number  of  private  wires  inl 

most  of  our  big  cities  is  such  that  there  is  not  muc 

chance  for  profit.     But  between  Xew  York  and  Loi 

don  there  are  comparatively  few  competitors  in  the  fiel 

and  cabling  is  too  expensive  a  luxury  to  be  indulge 

in  freely. 

Where  the  Xew  York  house  has  the  right  Londo 
connections  this  arbitrage  business  in  bonds  is  exceed 
ingly  profitable.  Even  on  fairly  active  bonds  it  is  nc 
at  all  unusual  to  make  over  a  point  net,  while  on  bond 
in  which  there  is  not  a  continually  quoted  market  ther 
is  the  opportunity  to  take  much  more.  The  elemen 
of  risk,  too,  can  be  completely  eliminated  if  the  opera 
tor  wishes,  for  firm  bids  and  offers  for  cable  reply  are  t( 


INTERNATIONAL    SECURITY    MARKET       4H9 

'«"  had  in  both  markets.  ^Vhat  is  uhsohitely  esscntiul, 
of  course,  in  business  of  this  kind,  is  to  hiive  a  man  in 
charge  of  it  who  knows  not  only  the  market  here  but 
t'xuctly  where  the  right  bids  and  offers  are  to  be  found 
(HI  the  other  side. 

;no.  Market  influences.— These  are  the  three  great 
classes  of  international  security  trading.  Concerning 
their  effect  upon  exchange  rates  it  is  apparent  that  as 
the  speculative  stock  operations  described  are  usually  of 
a  temporary  nature,  and  as  arbitrage  transactions  in 
stocks  and  bonds  are  evened  up  the  same  day,  the  first 
class  of  dealings  is  the  only  one  which  can  exert  any 
permanent  influence  on  foreign  exchange  and  the  inter- 
national money  market.  There  are  times,  in  fact,  when 
the  foreign  exchange  market  is  governed  exclusively 
by  international  investment  sales  or  purchases  of  se- 
curities. The  trade  balance,  heavy  exports  of  commodi- 
ties, and  such  factors,  seem  to  be  completely  ignored. 
What  seems  to  be  all-important  is  the  fact  that  a  selling 
movement  is  under  way.  Stocks  are  being  sold  and 
exchange  to  pay  for  them  must  be  had.  So  the  price 
of  exchange  goes  up. 

Such  a  rise  in  exchange  is  by  no  means  necessarily 
due  to  stocks  or  bonds  actually  sold.  Very  frequently 
it  is  predicated  upon  what  foreign  exchange  managers 
and  dealers  think  of  the  chances  of  a  continuation  of 
the  selling  movement.  Europe  may  sell  50,000  shares 
of  investment  stock  here  to-day  and  exchange  will  have 
to  be  found  to  pay  for  it.  But  what  really  regulates 
the  price  of  that  exchange  is  what  the  dealers  think 
of  the  probability  of  the  selling  movement's  going  on. 
If  they  think  that  Europe's  sales  of  to-day  will  be 
followed  by  continuing  sales  to-morrow  and  next  week, 
tliey  figure  that  exchange  will  have  to  be  bought  all 


4!>0 


FOHr.K.N  Kxrif.wr.F, 


I  I 


nloii^',  nnd  they  will  Ik-  loath  t(»  draw  on  thtir  huhinct 
It  not  inl'reqiu'ntly  hapiuiis  that  hankers  have  ^«m 
rouiui  halant'cs  ahioad  drawing  hut  very  nuMlerate  i 
terest,  but  that  it  is  inipossihle  to  buy  drafts  from  the 
except  at  contiinially  advancing  rates.  They  %u 
exchange  as  rising,  and  simply  dechnc  to  draw. 

320.  Strong  effect  on  ectchange  ra/f*.— Movemen 
of  this  kind  sometimes  go  on  for  weeks  and  months,  ai 
interrupted,  and  are  resumed.  It  is  wljen  stocks  an 
bonds  a "e  being  bought  by  us  on  the  foreign  markets  i 
quantity  that  foreign  exchange  is  consistently  strong 
and  when  we  are  seUing  on  a  large  scale  that  it  is  coi 
sistently  weak.  Other  influences  can  be  at  work,  bii 
an  actual  movement  in  securities,  either  way,  will  al'way 
give  the  exchange  market  its  real  trend.  And  it  is  fo 
that  reason,  more  and  more  as  the  financial  relationshi] 
between  our  own  and  the  foreign  markets  is  being  de 
veloped,  that  the  exchange  market  is  coming  to  h 
looked  upon  as  far  and  away  the  best  tangible  indica 
tion  of  what  the  international  movement  of  securitie; 
actually  is. 


CHAPTER  V. 


TIIF  MOVKMK.NT  OF  GOLD 

.'J-Jl.  Production    of  ^oW.— riulerlyiii^   the   whole 
(|ii(stion  of  gold  nioveint'iits — the  passage  from  one 
market  to  another  of  great  quantities  of  sjKjeie — is 
the  faet  that  of  the  gold  now  annually  produced,  a 
•food  deal  more  than  half  originates  in  countries  which 
liave  no  great  need  for  a  circulating  medium,  and  must 
lie  distributed  to  the  hanking  centers  of  the  countries 
wliieh  have  and  which   produce  no  gold  themselves. 
The  production  of  gold  in  1912  was  $471,000,000,  of 
which  $218,000,000   originated   in    Africa   and   ahout 
$.)(),000,000  in  Australasia.    Practically  all  of  this  new 
irohl  has,  in  the  first  place,  to  make  what  might  be 
eailed  a  primary  movement  from  the  mines  to  some 
eefiter  from  which  it  can  be  redistributed.     London  is 
that  center;  has  been  from  time  immemorial.     Imports 
of  viigin  gold  into  London  l)etween  the  j'ears  1905  and 
in08   inclusive   amounted   to   $700,000,000.     Of   this 
amount  London   retained   but  $67,000,000.     The  re- 
mainder was  all  distributed  to  other  countries — $205,- 
000,000  to  France,  $170,000,000  to  the  United  States, 
and  the  balance  scattered  among  other  countries. 

It  is  important  to  note  the  conditions  under  which 
this  distribution  of  gold  takes  place.  The  gold  market 
in  I.ondon  is  held  every  Monday  morning.  On  that 
day  there  is  a  public  auction  of  the  new  gold  which 
has  arrived  during  tlic-  past  week.  The  brokers  repre- 
senting the  various  foreign  banks  and  the  local  banks  as 

491 


499 


FOREIGN   EXCHAXGE 


if 


well,  come  prepared  to  hid  for  tlu  new  gold  according 

the  exchange  on  various  points  allows  them.     The  Bai 

of  England  is  re(iuired  hy  law    to  buy  all  the  gc 

offered  it  at  the  rate  of  77  shillings,  9  pence  per  oun 

(that  is  to  say,  gold  of  the  fineness  of  British  so 

creigns,  .910-2-3) .     Above  this  amount  the  brokers  ci 

bid  according  to  the  urgency  of  the  demand  on  the  pa 

of  the  principals  Mhom  they  represent.     Gold  very  fr 

quently  sells  veiy  much  above  77  shillings,  9  pence- 

during  the  panic  of  1907,  in  fact,  the  rate  went  up  as  fi 

as  78  shillings,  2  pence  per  ounce. 

322.   Distribution  of  gold.— But  after  the  gold  hi 
been  taken  in   London  and  sent  to  various   foreig 
centers  it  does  not  follow  that  the  distribution  is  con 
plete.     Financial  conditions  obtaining  at  those  poini 
may  make  it  possible  for  the  time  being  for  representj 
tives  of  bankers  at  those  points  to  go  into  the  Londo 
market  and  get  gold  by  bidding  for  it,  but  later  thes 
conditions  may  so  change  as  to  necessitate  a  furthe 
readjustment.     Frankfort,  for  instance,  may  be  in 
position  to  obtain  a  good  part  of  the  gold  arriving  dui 
ing  some  week  in  London,  but  in  a  very  short  time  i 
may  come  about  that  Paris  may  be  able  to  draw  mos 
of  that  gold  from  Frankfort.     And  so  there  is  a  cohtin 
uous  movement  set  up,  after  the  first  radiating  of  thi 
gold  from  London,  which  might  well  be  called  a  sec 
ondary  distribution.     When  exchange  is  high  gold  goei 
out  and  when  exchange  is  low  gold  comes  in.     It  ma\ 
seem  almost  too  elementary  to  mention  this,  but  for  a 
clear  understanding  of  the  various   influences   whid 
govern  gold  movements  it  is  indispensable  that  tlie  idea 
should  be  firmly  established  how  the  movement  takes 
place  along  the  lines  of  exchange  rates.     When  ex- 
change on  a  point  is  high  it  indicates  primarily  a  scarcity 


THE  MOMvMFA  r  OF  CxOLD 


403 


of  ( xclian^c  and  a  ^reat  demand.  Consequently  when 
t!if  (h'inand  conies  to  exceed  tlie  supply  some  other  me- 
dium of  exchange  must  be  found  ana  gold  goes  out. 
C'()n\crse]y  with  regard  to  imports,  when  exchange  on 
any  point  is  exceedingly  low,  as  for  instance  when  it 
is  i>ossihle  to  buy  a  pound  sterling  in  New  York  at 
Si.84  or  $4.83,  gold  naturally  tends  to  come  in.  When 
a  pound  can  be  obtained  at  so  low  a  rate  it  is  possible 
to  go  into  the  foreign  markets  and  pay  a  premium  for 
<f()ld.  It  is  the  simple  idea  that  when  a  draft  on  any 
j)Iace,  local  or  foreign,  can  be  cheaply  obtained,  it  is 
possible  to  go  into  that  place  and  pay  a  high  price 
tor  anything  which  you  may  happen  to  want  to  buy. 

The  difference  between  gold  exports  and  imports  is, 
after  all,  merely  a  matter  of  view  point.  We  consider 
that  we  are  shipping  gold  to  London;  London  con- 
siders that  she  is  importing  gold  from  the  L^nited 
States.  It  is  one  and  the  same  thing,  merely  a  question 
as  to  how  you  look  at  it.  LTnderstanding  the  causes 
which  make  exchange  high  and  thus  causes  gold  to  flow 
i'rom  one  country  to  another  is  understanding  the  causes 
which  govern  both  exports  and  imports  of  the  metal. 

32.3.  Small  merchandise  carports. — As  to  the  influ- 
ences which  tend  to  raise  foreign  exchange  and  thus 
cause  gold  to  move,  there  are  four  main  points  to  con- 
sider. The  first  may  be  stated  as  small  merchandise 
exports  resulting  in  a  scarcity  of  exchange.  The  sec- 
ond has  to  do  with  low  money  here  and  the  remitting 
of  balances  to  points  at  which  they  can  be  more  profit- 
ably employed.  The  third  consideration  has  to  do  with 
iiigh  money  at  some  foreign  point  which  draws  capital 
tliere  and  consequently  raises  the  rate  of  exchange  on 
that  point.  The  fourth  consideration  is  the  interna- 
tional selling  of  securities. 


404 


I    ■ 


FORI- KJN  EXCHANGE 


f 

I  4 

S 1 

11     '"" 

if  ^ 

•  1  "' 

li ' 

1 1 ' 

< 

i 

t 

1 

With  regard  to  the  first  question— tliat  of  cxpc 

and  imports  in  tiieir  effect  upon  the  gold  niovcnien 

It  may  be  considered  that  while  the  old  school  of  eco 

mists  overrated  the  importance  of  the  merchandise  trj 

balance,  it  is  just  as  wrong  to  go  to  the  other  extre 

and  fad  to  recognize  the  enormously  important  ini 

ence  which  merchandise  shipments  do  actually  ex 

upon  the  movement  of  specie.     Small  exports  me 

small  supplies  of  exchange.     When  exports  are  smj 

drawings  of  exchange  against  them  are  small,  and,  r 

having  large  balances  on  the  other  side,  bankers  t 

forced  to  charge  a  high  rate  of  exchange  for  any  bi 

which  customers  may  want  them  to  draw. 

324.  Lotv  money  and  remitting  of  balances.~The  se 

ond  factor  making  for  high  exchange  is  low  mone 

31oney  and  exchange  rates  always  work  counter,  th 

IS  to  say,  when  money  rates  rise  exchange  rates  declin 

and  vice  versa.     The  reason  is  that  when  money 

cheap  at  any  given  point,  lending  institutions  send  awa 

their  loanable  funds  to  some  other  point,  to  accompli* 

which  end  they  have  to  buy  large  quantities  of  exchang 

thereby  putting  up  rates.     During  a  long  period  c 

cheap  money  there  is  almost  a  continuous  demand  fc 

exchange   by  bankers  who  want  to  send  away  thei 

money  to  points  where  a  better  return  can  be  had  fo 

Its  use,  and  this  demand  almost  invariably  results  i) 

a  continuously  high  level  of  exchange  rates.     Every 

body  wants  to  send  funds  away  from  a  point  when 

money  is  in  such  poor  demand.     Frequently  the  onh 

way  in  which  it  can  be  sent  is  in  the  form  of  gold 

32.5.  High  money  rates.—With  regard  to  the  third  in- 
fluence making  for  high  exchange,  when  money  is  high 
at  some  foreign  point,  everybody  in  the  business  of 
lending  money  wants  to  remit  to  that  point.     Granted 


THE  MOVEMENT  OF  GOLD  405 

that  the  financial  center  in  question  is  one  of  importance, 
a  place  for  instance  in  which  it  is  possible  to  carry  on 
lar^e  loaning  operations,  it  is  almost  inevitable  that 
exchange  rates  on  Ihat  point  will  rise. 

Just  here  attention  ought  perhaps  to  be  given  to  the 
•incstion  of  the  manipulation  of  the  foreign  money 
markets  in  order  to  influence  exchange  rates  upon  them 
at  outside  points.     The  bank  rate  in  a  foreign  market 
such  as  ^ondon  or  Paris,  is  of  enormous  importance 
III  (leterminmg  what  the  level  of  money  there  will  be. 
The  English  bank  rate,  for  instance,  is  of  such  im- 
portance that  a  rise  in  it  of  not  more  than  one-half  of 
1  ])er  cent  is  often  enough  to  make  a  big  difference 
.:;  exchange  on  London  all  over  the  world.     Outside 
exchange  rates  are  singularly  sensitive  to  the  movement 
of  the  Bank  of  England  rate,  something  which  is  prob- 
ably accounted  for  by  the  fact  that  London  is  the 
financial  center  of  the  world,  the  point  through  which 
imports  and  exports  all  over  the  world  are  fi.  anced 
London  might  be  called  the  ganglion  of  the  world's 
financial  nerve  system  from  which  the  slightest  shock  is 
.cflected  throughout  commerce  all  over  the  earth.    That 
being  the  case,  the  governors  of  the  Bank  of  England 
wlio  have  the  making  of  the  bank  rate  in  charge,  or 
the  governors  of  the  Bank  of  France,  who  have  the 
power  to  influence  their  own  market  in  like  degree,  are 
able  to  raise  or  lower  most  arbitrarily  the  level  of  money 
and  thus  cause  a  rise  or  fall  at  other  cities  in  the  foreign 
exchanges  on  London  or  Paris. 

•'i'2ix  International  trading  in  securities.— The  fourth 
consideration  making  for  high  exchange  has  refer- 
ence to  the  selling  of  securities  by  one  market  in  an- 
other. When  Europe  sells  stocks,  for  instance,  we  buy, 
and  when  we  buy  we  have  to  pay  for  what  we  have 


406 


FOREIGN  EXCHAxXGE 


■t 


;  f 


i 


bouglit.     It  is  well  worth  while  to  note  the  relat 
between  exchange  rates  and  the  movement  of  some 
the  international  stocks.    A  sudden  selling  movemi 
by  London  of,  say,  forty  or  fifty  thousand  shares 
high-priced  stocks  is  very  often  enough  to  give  a  sh« 
upturn  to  exchange  rates  here.     As  an  underlying  a 
continued  influence  the  trade  balance  or  low  money  he 
or  high  money  there,  may  have  a  much  more  power! 
effect,  but  this  question  of  a  sudden  demand  for  e 
change  to  pay  for  forty  or  fifty  thousand  shares 
stock  is  enough  to  cause  astonishingly  sharp  swings 
the  exchange  market— often  enough,  in  fact,  to  pu 
the  rate  just  above  the  gold  export  point. 

327.  Methods  of  moving  gold.— Turning  from  tl 
discussion  of  reasons  why  gold  moves  from  one  counti 
to  another  to  the  way  in  which  it  moves,  shipments  mj 
be  divided  into  two  broad  classes,  direct  and  indiret 
In  the  first  case  the  gold  is  shipped  straight  to  the  poii 
to  which  it  is  desired  to  transfer  the  balance.  In  tl 
other  case  the  gold  is  shipped  to  some  third  place  f( 
the  purpose  of  buying  exchange  upon  the  place  to  whic 
the  balance  is  actually  to  be  transferred. 

Taking  up  direct  shipments  first,  the  operation  i 
about  as  follows:  A  banker,  finding  exchange  crndi 
tions  favorable,  decides  to  ship,  say,  ,£40,000  to  Londor 
He  goes  to  the  assay  office,  buys  the  gold  and  ships  i 
to  his  foreign  correspondent,  at  the  same  time  drawin/ 
bills  of  exchange  against  the  newly  created  balance 
If  one  can  sell  these  bills  of  exchange  for  more  dollar 
than  it  cost  him  to  buy  the  gold,  pay  the  charges  on  it 
and  ship  it  across,  he  makes  the  difference. 

The  following  tables  show  the  operation  in  detail, 
The  first  table  shows  what  it  costs  to  get  the  gold  out  of 
the  assay  office  and  send  it  to  Europe.     The  other  tables 


!  relation 
'  some  of 
novement 
shares  of 


»  a 
ying  and 
ney  here, 
powerful 

for  ex- 
hares  of 
wings  in 

to  push 

rom  the 
country 
nts  may 
indirect, 
he  point 
In  the 
lace  for 
to  which 

ation  is 
;  crndi- 
-jondon. 
ships  it 
[rawing 
jalance. 
dollars 
!S  on  it, 

detail. 
1  out  of 
r  tables 


THf:  MOVEMENT  OF  GOLD  497 

show  what  amount  of  foreign  currency  would  be  realized 
m  case  the  metal  were  sent  to  either  England,  France 
or  Germany,  and  the  rate  at  which  the  American  banked 
shipping  the  gold  would  have  to  sell  his  reimbursing 
drafts  m  order  to  come  out  even  on  the  transaction: 

COST  OF  BUYING  AND  SHIPPING  GOLD. 

IO,OW)^ ounces  bar  gold.  .DOH  fine,  at  $-'0.67I83i:  per  ounce  1.000 

Plus  premium",  United'  States  assay'  office,'  il'iob"  per  cent " ." .' .'  .* .' ."  ^'^^'^H'^ 

Packing,  cartage,  etc..  5  kegs  at  U26  per  keir  $205,353.37 

Kreight.  S-3i  per  cent    ...  Per  keg , ,  2^ 

Inburance,  1-20  per  cent,  less  10  per  cent' ..'.'.'.'.'.'. ^"^'^^ 

$205,777.71 
CREDITED  IN  GREAT  BRITAIN 

1-18-0  12-  S-0 

To  come  out  even,  drafts  must  he  sold  at  488.78.  £«,10O-  2-0 

CREDITED  IN  FRANCE. 

10,000  ounces  gold   993  fine.  3412.94  francs  per  kilogram. .       Fes    1  061JU.  1A 
Less  1-40  per  cent  commission  !?..  F^eiio  ^'^^'^•^•^9 

PettleS      •  T  nn 

*7.00  309.50 

Tn  come  out  even,  drafts  must  be  sold  at  515.766.  ^'^'  ^'^^'^'-^ 

CREDITED  IN  GERMANY. 

10,000  ounces  gold    993  fl„e  at  2784  n.arks  per  kilogram        Mks   859  858  •«. 

Less  1-10  per  cent  commission  ."..  Mks.  215.66  ^^^'^^^-^ 

'''     37.60  252.60 

To  come  out  even,  drafts  must  be  sold  at  95.754.  ^'"-  ^^^'^^^-^O 

328.  Indirect  methods  of  moving  ^oW.— Indirect 
s  upments  are  of  great  variety  but  are  all  founded  on 
the  idea  of  sending  gold  to  some  point  where  it  can 

C— VIII— 32 


n 


4J)8  FOREIGN  EXCHANGE 

be  used  to  buy,  cheaply,  exchange  on  some  other  poir 
Of  these  transactions,  the  one  l)est  known  is  the  so  calh 
"trianirular  operation"  in  which  tlie  gold  is  shipped 
Paris  for  the  purpose  of  buying  exchange  on  Londo; 
The  succession  of  steps  is  as  follows:     The  metal 
shipped  to  the  French  capital;  exchange  on  London 
purchased  with  the  proceeds;  this  exchange  is  then  r( 
mitted  to  London  for  credit  of  the  American  shippt 
of  the  gold;  the  shipper  draws  his  sterling  draft  o 
London  against  the  newly  created  balance. 

The  full  details  of  an  actual  shipment  are  as  fo] 
lows: 

48,500  ouiu'es  Imr  gold  .995  fine  at  $i0.5684   ...  cao?  « 

Freight,   %   per  cent    jgV.iii 

Insurance,  4V<,   c.   per  $100    .".'.'.'.".""  450 

Assay  office  charge  4  c.   per  $100    ...    '. 400 

Interest  6  days  at  -'  per  cent    333 

(From  time  gold   is  shipped  to  Paris  until' the 
drafts  on  London  can  be  sold.) 

Cartage  and   packing    gQ 

Com.   in   Paris    ..'..'.'.'.'.'.[[['.  3&0        2,74( 

Banque  de  France  buys  gold  .995  fine  at  fcs.  3419.81  ner  9^'^^^' 

kilo  (=  106..1705  francs  per  troy  ounce)  ^ 

48,500  ounces  at  fcs.  106.3705  =  fcs.  5,158,969 
Fcs.  5,158,969  at  :i5.10  =  JEi05,536. 
£.^05.«6  at  486.70  =  1,000^, 

Profit  $  3o 

Conditions    under    which  fVew  York  Exchange  on  London  T: iMTo 

there  is   practically  no^  Paris  Exchange  on  London  ....  0310 

profit  or  loss.  t  Money  in  New  York 2  per 'cent 

329.  Profits  011  shipments.— Under  ordinary  circum- 
stances, if  a  banker  makes  between  $500  and  $1,000 
on  a  million  dollar  shipment  he  considers  himself  very 
well  paid.  Considering  all  the  trouble  which  the  earn- 
ing of  this  amount  involves,  the  business  is  not  over- 
attractive.  The  fact  is  mentioned,  not  to  show  that 
gold  exports  are  not  important  but  rather  to  show  why 
it  is  that  a  great  many  bankers  will  not  go  in  for  them. 


THE  MOVEMENT  OF  GOLD  499 

A  number  of  houses  in  fact  never  undertake  gold  ship- 
mmts  under  ordinary  circumstances. 

There  is  f urtlier  to  be  considered  the  over-draft  which 
results  from  a  shipment  of  this  kind  and  which  at  times 
makes  a  stram  on  a  firm's  credit.     It  is  to  be  borne  in 
n.nu    tiiat  the  drafts  which  are  sold  on  London  at 
the  l,eg,nnmg  of  the  operation  are  immediately  sent 
over  there  by  the  buyer.     On  the  other  hand  th^  gold 
"Incli  goes  to  Paris  takes  some  time  to  arrive  there  and 
even  after  its  arrival  one  or  two  davs  must  be  allowed 
I'T  assaymg  and  crediting  it,  so  that  the  "cover"  for 
tlie  drafts  which  have  been  drawn  on  London  does  not 
arrive  in  London  until  three  or  four  days  after  the 
(Ira  ts  have  been  presented.     Naturally  an  over-draft 
of  this  amount  is  only  possible  where  the  house  in  Lon- 
<lon  and  the  house  in  New  York  are  closely  affiliated 
U  hen  the  drafts  are  drawn  the  New  York  house  advises 
hy  cable  that  gold  has  been  shipped  to  Paris  for  cover 
But  even  at  that,  unless  the  London  house  has  explicit* 
tai  h  m  Its  yew  York  correspondent  it  will  hardly  be 
wilhng  to  pay  oat  a  million  dollars  even  with  the  ce^^ 
tamty  of  reimbursement  within  three  days. 

For  this  reason  the  business  of  shipping  gold  is  com^ 
T'^  to  be  more  and  more  confined  to  a  few  bankers  who 
Have  the  facilities,  whose  managers  are  adept  in  figurine 
out  any  possible  profit,  and  who  are  wilhng,  both  for  the 
sake  (,f  the  advertising  and  of  the  sometimes  very  small 
pn.ht,  to  go  to  the  trouble  which  gold  dJpmcr/cs  neccs- 
sarilv  involve. 


CHAPTER  VI 

FOREIGN  EXCHANGE  OPERATIONS  IN  CONNECl 
WITH  EXPORT  TRADE 

330.  Foreign  exchange  and  exports.— I^ack  of  im 

standing,  on  the  part  of  merchants  and  manufactu: 

of  how  goods  sold  by  one  country  to  another  are  i 

for  has  always  acted  as  a  certain  drag  on  American 

port  trade.    A  manufacturer  out  in  Chicago  has  so 

bill  of  goods  to  a  firm  in  St.  Louis— he  knows  all  a! 

how  payment  will  be  made  for  the   ;oods,  how  to  r 

them,  and  how  to  send  them  off.    But  in  the  case  oi 

order  coming  from  abroad  it  is  often  different.    IJ 

has  not  had  much  experience  in  exporting,  the  met 

by  which  he  will  get  his  money  is  not  apt  to  be  i 

understood  by  him.     He  has  a  vague  idea,  probal 

that  there  is  a  foreign  exchange  operation  involved 

the  payment  for  the  goods,  but  to  him  foreign  exchai 

has  always  been  a  mystery,  about  which  he  has  knc 

nothmg.    The  mere  phrase,  indeed,  suggests  a  series 

complicated  calculations  in  which  he  is  apt  to  get  hi 

self  involved  if  he  begins  trading  with  some  outs 

country.    He  knows  that  it  would  be  a  good  thing 

start  doing  business  with  the  outside  market,  but  i 

understanding  the  ins  and  outs  of  how  to  handle  1 

business  in  its  financial  as  well  as  its  selling  aspects, 

IS  apt  to  pass  the  whole  thing  by  with  the  reflection  tl 

It  is  safer  to  stick  to  the  domestic  market. 

It  is  quite  true  that  there  is  an  operation  in  foreij 
exchange  involved  in  all  shipments  of  merchandise  frc 
one  country  to  another,  but  it  is  by  no  means  true  th 

500 


FOREIGN    EXCHANGE    OPERATIONS         r.Ol 

it  is  necessary  for  the  exporter  to  understand  all  about 
I'orei^ni  exchange  in  order  to  do  a  successful  export 
l)ll^incss.    The  amount  of  foreign  exchange  knowledge 
r((|iiired  by  the  average  exporter  of  goods  is,  indeed, 
sli^lit,  and  in  the  case  of  the  shipment  of  a  great  many 
(loiiustic  products  the  exporter  has  absolutely  nothing 
to  do  with  the  foreign  exchange  end  of  the  transaction 
at  all.    ^Vhere  it  has  been  arranged  that  the  seller  of 
the  goods  in  this  country  is  to  draw  a  draft  in  foreign 
currency  on  the  buyer  of  the  goods  in  some  other  coun- 
try, it  may  be  necessary  to  know  something  about  for- 
eign exchange  in  order  to  dispose  of  the  drafts  to  the 
best  possible  advantage,  but  where  the  shipment  is  being 
worked  under  a  credit  opened  in  dollars  with  some  New 
York  l)anking  house,  the  exporter  in  this  country  has 
sirnply  a  dollar  transaction  on  his  hands  and  nothing 
else. 

331.  Financing  exports  by  means  of  dollar  credits.— 
Let  us  consider  the  case  of  a  manufacturer  whose  ad- 
vertisement has  been  seen  by  a  buyer  of  merchandise  in 
some  foreign  country— and,  it  may  be  said,  incidentally, 
that  the  advertisements  in  American  periodicals  are 
ea<rerly  read  abroad.    A  letter  comes  from  the  foreign 
lioiise  making  inquiry  about  the  goods  which  have  been 
noticed.    The  house  here  looks  up  the  standing  of  the 
\vritcr  and  finds  that  the  house  on  the  other  side  is  in 
tiood  standing,  or,  if  not  particularly  strong,  yet  en- 
.ioys  fair  credit.     A  price  is  agreed  upon  and  a  sale 
made.     But  the  house  here  does  not  like  the  idea  of 
•hawing  a  draft  in  marks  direct  on  the  house  abroad, 
which,  we  will  say,  is  located  in  Berlin.     The  Berlin 
house  is  not  a  particularly  prominent  one,  and  the  ex- 
porter here  realizes  that  were  he  to  draw  a  draft  in 
marks  it  might  not  be  the  easiest  thing  in  the  world  to 


'>(H 


rORKIGX    F.XCUASCE 


^e  someone  to  lake  this  <lraft  off  his  hands  and  ffiv< 

do  lars  lor  .t.    Jiesidcs  that,  he  n.ay  not  haveTa 

penence  .n  drawing  drafts  of  this  kind  and  in  forv 

ing  the  necessary  docimients.     Taking  it  altoge 

therefore,  he  dee.des  that  he  Mould  rather  arrange 

inent  m  some  other  way  than  hy  drawing  direct  or 

buyer  m  Berhn,  and  so  writes  over  to  the  buyer  as 

him  to  open  a  credit  in  dollars  with  some  first-rate  ] 

York  house     "We  should  prefer,"  is  the  gist  of  . 

he  writes,    that  you  wo.dd  arrange  so  that  we  can  d 

in  dollars  upon  some  house  in  New  York,  in  order 

we  may  not  have  to  negotiate  a  foreign  draft  " 

Ihe  operation  of  opening  up  such  a  cred  t  is  al 

as  follows:    The  buyer  in  Berlin  goes  to  a  bank  th 

which  has  close  commercial  connections  with  ^Vmer 

and  asks  that  bank  to  open  up  for  him  a  dollar-credi 

^e^v  ^ork     In  its  willingness  to  do  this  the  fore 

bank  IS  guided  entirely  by  the  standing  of  the  fi 

which  makes  the  request  and  by  the  profit  (commissic 

which  the  business  offers.     If  the  bank  considers  . 

business  desirable,  it  will  agree  with  the  Berlin  impo 

ing  house  to  open  up  the  dollar  credit  for  the  Americ 

exporter  with  its  Xew  York  banking  corresponde, 

Ihe  terms  having  been  arranged,  the  Berlin  bankii 

house  writes  or  cables  to  its  correspondent  in  New  Yoi 

asking  the  correspondent  there  to  open  a  credit  for  s 

and-so  many  dollars  in  favor  of  such-and-such  a  firm 

manufacturers  located,  say,  in  Chicago.    In  this  crec 

there  are  set  forth  the  terms  on  which  the  Chicago  fir 

is  to  be  allowed  to  draw  upon  New  York,  the  varioi 

documents  which  are  to  accompany  the  drafts,  etc. 

Credits  of  this  kind  vary,  of  coiirse,  according  to  th 
requirements  of  the  foreign  importer  and  the  deal  whic 
he  has  made  with  the  exporter  in  the  United  State« 


FOREIGN    EXCHAXGE    OPERATIONS 


50S 


The  details  are  all  arranged  between  buyer  and  seller. 
After  they  have  been  agreed  upon  the  buyer  abroad 
goes  to  his  bank  and  specifies  the  kind  of  a  credit  he 
wants  opened.  Sometimes  these  credits  call  for  pay- 
ment by  the  \ew  York  banking  house  of  the  cost  of 
insurance  and  freight.  Sometimes  that  is  paid  for  in 
Germany.  Again,  in  the  case  of  a  manufacturing  firm 
in  the  United  States  located  in  a  small  town,  where  it 
is  impossible  to  get  through-bills  of  lading,  it  may  be 
stipulated  in  the  credit  that  the  New  York  banking 
house  or  some  custom-house  broker  in  New  York  is  to 
arrange  for  the  exchanging  of  the  local  bills  of  lading 
into  through-bills  of  lading.  All  that  is  merely  a  matter 
of  detail.  In  each  particular  transaction  it  is  simply  a 
(juestion  of  these  points  being  settled  direct  between 
buyer  and  seller. 

332.  How  the  exporter  gets  his  money. — The  manu- 
facturer having  been  notified  that  a  credit  of  this  kind 
has  been  opened,  draws  his  draft  in  dollars  on  the  New 
York  bank,  puts  it  through  his  local  bank  and  is  out  of 
the  transaction.  Very  likely  the  local  bank  will  not 
actually  credit  his  account  until  the  draft  has  gone  to 
Xew  York  and  been  paid.  That,  however,  is  usually 
only  a  matter  of  a  few  days.  When  the  operation  has 
been  brought  to  the  point  that  the  manufacturer  can 
draw  a  draft  in  dollars  upon  some  first-class  New  York 
l)anking  house,  he  can  pretty  well  regard  himself  as 
iiaving  been  paid  for  the  merchandise  he  has  shipped. 

The  New  York  banking  house,  having  paid  the  draft 
of  the  exporter  and  taken  over  the  documents,  forwards 
them  to  its  banking  correspondent  in  Berlin.  The  latter 
receives  these  documents  and  holds  them  at  the  disposi- 
tion of  the  party  who  opened  the  credit.  As  to  the 
terms  under  which  these  docimients  will  be  turned  over 


.304 


FOnEIGX    EXCHANGE 


,        !  ■ 


to  the  German  importer,  everything  depends  UDon 
fl.mne,.l  s„.„di„«  „f  „,,  l«,.er'    u^  ;/.  ^Z^ 

will  turn  over  the  .IcKument.,  «t  onw.  even  though 
commereml  H„„  may  no,  have  n.ade  final  paymer 
on  the  other  hand,  the  hank  deeides  that  greite  ear 

888.  The   q,,e,lio„   of  commmio„.-Many  an  e 

porter  who  ,s  doing,  and  for  some  time  has  done.  a"a 

faetoo.  export  business  knows  „„tl„„g  M-hatever  ate 

these  transaetmns  tetween  the  buyer  on  thejthert^ 

and  h,s  bank,  nor  is  knowledge  on  this  subjeet  n^eV. 

exeept  as  ,t  may  throw  further  light  upo'n  the  wZ 

nes   or  unwdhngness  of  foreign  in.porters  to  ope"  u 

ered,ts  m  th.s  eountry.    Not  for  notWng,  of  course  do" 

either  the  bank  n  Berlin  or  the  bank  in  New  l"  k  ' 

mto  the  transaetion.    Both  of  then,  expect  to  get  a  «,n 

m.ss,on  out  of  the  business,  and  that  commission  ha"^ 

eome  out  of  the  importing  firn,  abroad.  wlWch  olns  th 

ered,t.    No  hard-and-fast  rule  can  be  given  asCwha 

th,s  commission  amounts  to.    That  istve"^    mW 

by  the  terms  of  the  cre.Iit.    In  a  general  wa^^how  " 

U  can  be  sa.d  that  the  longer  the  credit  extended  "oth 

German  .mporter  by  his  local  bank  the  more  w^U  b^ 

charged,  and  that  the  commission  reeeive<l  by  thTceP 

and"its''lrer'  ""  Tt^'  '''"''  '^"'  "P  -^'ween  iSf 
and  Its  American  banking  correspondent 

Jnt'  f^'^f*'/'''^'  ^'^  the  importer. -Tvom  the  stand- 
point of  the  American  exporter  a  credit  of  this  sort  is 


FoRiiKiN    KXCHA\(iE  OPERAJft)N5i 


JOS 


an   txreedin^fly   favorahle   arrangement.     He   has,   of 
.otirse.  no  t-omraisswii  to  pay.     He  is  not  involved  in 
any  foreign  exchange  operation.     When  he  gets  ready 
to  ship  tlie  goods  he  can  simply  draw  his  draft  in  dollars 
on  New  York,  attach  the  docnnients  and  get  his  money 
piac'ticalh'  at  once.     All  of  which  is  very  convenient  foV 
the  American  exporter— more  ^o  than  it  is  for  the  Ger- 
ii.ari  importing  house,  wiiie!,  has  to  pay  the  commission 
In  a  good  many  cases,  therefore,  the  foreign  house  does 
not  care  about  arrangmg  a  credit  of  this  sort.     A  sale 
has  been  made.      "Draw  upon  us  in  marks  for  the  in- 
vn.ce  amount.  •  urites  the  foreign  house:     you  will  have 
M.  trouble  in  -tmverting  the  draft  into  (ioUars." 

AN'here  tbr  riuuiufacturer  here  is  located  at  a  point 
IK.ssessmg  exchange  facilities,  and  where  the  house  on 
the  other  side  is  in^  enough  and  strong  enough  so  that 
(hafts  drawn  upon  it  can  be  readily  sold  in  the  foreign 
exchange  market,  for  dollars,  this*  way  of  doing  busi- 
iiess  IS  all  right.  The  seller  of  the  g(»ods  here  gets  to- 
gether his  papers,  draws  his  draft  in  marks,  attaches 
them  all  together,  and  «ells  the  whole  to  his  local  bank. 

im.    Improvement    in   facilitie ft. —There   are    other 
ways,  of  course,  in  which  goods  exported  can  be  paid  for 
tlian  by  the  opening  of  dollar  credits  and  by  the  draw- 
'iiM-  of  a  draft  upon  the  buyer  abroad  or  some  bank 
•l^'s.gnated  by  him.  but  in  the  bulk  of  export  transac- 
tions either  one  or  the  other  of  these  two  methods  is  eni- 
i'loyed.     Where  it  is  possible,  as  a  rule,  the  American 
exporter  prefers  to  have  a  dollar  credit  opened  in  Ne^^' 
^ork  or  some  other  big  city,  on  which  he  can  draw 
Hut  with  the  spread  of  the  foreign  exchange  system  all 
over  the  country,  the  drawing  of  direct  drafts  has  been 
greatly  facilitated,  and  a  large  amount  of  business  on 
tins  basis  inaugurated.     With  the  close  connection  now 


i 


.joe 


FOREIG.V  EXrHAXCJE 


existing  between  the  inland  banks  and  their  New  ^ 

'  orrespondents  there  is  really  very  little  trouble  ,1 

arranging   he  flnaneing  of  export%ransactions'  1 

there  IS  nothing  complieated  about  it,  and  that  it  is 

about  as  easy  for  a  house  in  Chicago  to  arrange  i 
ment  for  a  W,,  ..f  ^^^  ^^^  .^  ^^^^^  ^^      "ge 

goods  sold  m  St  Louis,  is  coming  to  be  more  and  „ 

generally  recognized,  and  is  one  of  the  principal  cai 

of  the  growth  of  the  export  business.     ^        *^     "" 

336.  Earport  letters  of  credit—With  exports  to  co, 

tries  where  banking  facilities  are  not  well  developed 

IS  not  quite  so  easy.    In  the  case  of  shipments  to  m 

South  American  countries,  for  example,  the  impor 

IS  not  able  to  go  to  his  bank  and  arrange  a  crcdH^TJ 

done  by  the  Berlin  banker  in  the  casf  before  refe.^ 

to.    In  financing  exports  of  this  sort,  therefore,  a  d 

ferent  system  is  necessary.    It  has  come  about,  the, 

fore  that  there  has  been  developed  the  system  ot  wh 

are  known  as  "export  letters  of  credit  " 

Commercial  letters  of  credit  for  exports  are  issued 
great  variety  of  form,  but  all  of  them  are  designed  1 
facilitate  to  the  greatest  possible  extent  payml^t  f, 
^ods  shipped  to  countries  not  having  close  bankin 
relations  with  ourselves.  A  lot  of  agricultural  machi. 
ery,  we  will  say,  has  been  sold  in  Buenos  Aires.  For  tl, 
buyer  down  there  to  send  up  a  draft  drawn  in  dollar 
in  payment  ,s  ahnost  impossible-there  is  no  good  ex 
change  market  existing  between  New  York  and  Bueno, 

purchase  drafts  drawn  in  dollars  on  New  York  or  on 
other  American  cities.    The  shipper  here,  on  the  other 

vow;^'*'  ?r."'""','.°  """  '"  '"*  *  '•omittance,  in- 
wT'  r  .  T"."'  '  '°"8  "^^''y  «"<1  considerable 
loss  of  interest.    To  facilitate  this  business  of  shipments 


lOREK.X  EX(  HAXr.E  OPERATIONS  507 

frnw  yew  York  to  South  American  points,  therefore— 
..ke  possible  the  business,  one  might  almost  say— 
mider  present  conditions,  the  intervention  of  a  banker 
is  necessary. 

To  the  banker,  therefore,  the  New  York  merchant 
who  has  sold  the  machinery  in  Buenos  Aires  goes  and 
asks  for  an  export  letter  of  credit.  "We  have  sold  a 
lot  of  machinery  down  there,"  he  says,  "which  will  be 
l)ai(i  for  about  thirty  days  after  its  arrival.  In  the 
meantime  we  do  not  want  to  be  out  of  the  money.  Here 
are  the  bills  of  lading  made  over  to  yourselves,  and  here 
are  the  invoices  and  all  the  necessary  papers.  Give  us 
a  letter  of  credit  so  that  we  can  get  our  money  at  once 
on  tins  shipment  and  take  up  other  business." 

3.37.  How  the  credit  works.— To  the  banker  this  is 
an  attractive  proposition.    A  bona-fide  trade  has  been 
put  through;  he  has  all  the  evidences  of  it  in  his  own 
liands,  the  bills  of  lading,  invoices,  etc.     I.     knows 
moreover,  that  by  the  issue  of  an  export  letter  of  credit 
he  can  cause  the  exporter  to  get  the  money  he  wants 
Without  he  himself,  the  banker,  putting  up  any  actual 
cash.    If  the  exporter  be  allowed  to  draw  a  ninety-day 
draft  on  the  New  York  banker's  London  correspond- 
ent, for  mstance,  that  draft  can  be  sold  for  dollars  in 
the  New  York  exchange  market  and  the  exporter  get 
the  money  he  needs  at  once.     This  ninety-day  draft 
drawn  by  the  exporter  will  be  "accepted"  upon  its  ar- 
rival m  London,  but  it  will  not  have  to  be  actually  paid 
for  nmety  days.    In  the  meantime  the  merchandise  will 
have  been  sent  to  South  America,  will  have  been  paid 
f(.r,  and  the  proceeds  remitted  to  the  London  banker  on 
whom  the  American  exporter  drew  the  ninety-day  draft 
Ac  actual  cash  will  have  been  put  up  by  either  banker 
engaged  in  the  transaction. 


>08 


F()REK;.v  KXCHAXCK 


4J 


JNeu  1  „rk  hanker  pi<xe«ls  t„  issue  the  cxiMrt  letle, 
credit  des,re,l.    I„  this  document  the  exporte    "f 
n.ach,„ery    s  authorized,  under  certain  Cdt„„ 
tie  I  '"7'7'>-<%  »is'.t  draft  in  pounds   tS 
tl  e  I  on.lo„  hanking  correspon.Ient  of  the  hanker  h 
vho  issues  the  eredit.     The  hills  of  lading  at    „| 
documents,  ,t  is  provided,  are  to  be  turned  orer  to 
banker  who  issues  the  credit  so  that  the,  mav  be  f 
warded  by  hin,  to  his  correspondent  in  B.^os  Air 
;°  ro   r""  ";  '^™"-"""  "f  «-•  ".oney" 

is   eV  forth  aTt^''^'  '"."'"'  ''''"^'^-    This  money, 
IS  set  to.  th,  as  it  is  collected,  is  to  l>e  remitted  not  h», 

to  -New  York  hut  to  the  hanker  in  L„„™wh„m 
cport  credit  gives  the  ship,.r  here  a  right  "„  draw 

oft:^l:Z  "'  '^T'  f "'"  P"-^'"-  "-at  rt'ea 

.1  aws  Xad   t       ■'"* '"'  '""''  °"  ^"'^""-  'he  bank. 

t^rmethod     Th  "       •  ^^r  ""  '"'"'  '"^™""'8^^ ' 
knl^  tf  f  •'"'"''P'''  °"^  '^  "'"»•  however  wei 

salable  at  aT  mT  "i'"^'  '^'  ""  '«'"''"•»  "■•''»'  -"  b 
salable  at  a  slightly  better  rate  of  exchange  than  hi 

o  iits'  trr """  '"^  ^''"  '^'''^ "  '^-' "-"' 

oi  aoiiars  trom  the  same  amount  of  pounds.    Anothei 

saved  the  trili::?  stpSraTot:^-—^^^^^^^ 
rate  possible  for  the  hills  he  wants  to  sell.    The  blnkc 
does  all  that  for  him,  not  infrequentlv  taking  the  M 
for  Ins  own  account.  *" 

sCment  of  J  h        "    ''^  "  "'"'^^*^  ^^"""Ple-    The 
Shipment  of  machinery  in  question,  we  will  ^av  is  worth 

ten  thousand  dollars.    The  exporter  gets  his  letter^f 


FORKKiX  KXrilAM.E  OPERATIONS 


509 


credit  aiul  draws  a  ninety-day  draft  on  London  for,  say 
1,800  pounds,  that  being  ninety  per  cent,  of  the  value  of 
the  shipment.    This  draft  he  sells  in  the  New  York  for- 
ei^rii  exchange  market   (the  letter  of  credit  being  his 
aiitiiorization)    and    receives    dollars    therefor.      That 
•rives  liim  his  money  and  practically  puts  him  out  of  the 
transaction.    The  documents  he  turns  over  to  his  banker, 
who  sends  them  along  to  Buenos  Aires.    At  the  end  of 
forty-five  days,  we  will  say,  the  South  American  banker 
has  eollected  the  whole  ten  tliousand  dollars.    He  then 
proceeds  to  remit  this  money  to  London,  in  sterling 
drafts.    Before  the  ninety-day  draft  originally  drawn 
matures,  therefore,  there  will  have  been  received  in  Lon- 
don sufficient  funds  to  take  care  of  it,  and  neither"  the 
accepting  banker  nor  the  banker  who  originally  issued 
the  credit  will  have  had  to  put  up  any  actual  money. 
Tiie  amount  received  from  Buenos  Aires,  indeed,  will 
be  considerably  more  than  the  amount  of  the  draft 
drawn  originally.     This  surplus,  after  deduction  of 
charges,  is  remitted  back  to  New  York  and  then  turned 
o\  er  by  the  New  York  banker  to  the  party  to  whom  he 
issued  the  letter  of  credit. 

.•{.30.  Why  the  credit  is  issued  on  London. — In  con- 
nection Avith  the  above,  several  important  considerations 
present  themselves.  In  the  first  place,  why  is  London 
l)rought  into  the  transaction  at  all?— why  cannot  the 
operation  be  worked  direct  between  New  York  and 
IJnenos  Aires?  Answer  to  that  is  to  be  found  in  the 
fact  that  banking  relations  between  ourselves  and  South 
America  are  not  suflSciently  close  to  maintain  a  foreign 
excliange  market  in  which  remittances  and  drawings 
can  he  advantageously  made.  National  banks  here  not 
l)cing  allowed  under  our  present  laws  to  accept  time- 
<lrafts,  it  has  never  been  possible  to  establish  really  close 


olO 


FOREIGN-  EX(  rrAXGK 


banking    rdaiions    with    Sm.fl,     \ 

Probably  not  nmnv  n  American    connt 

the  London  ba^S  J^t  ?„.t      f  "-"'•"«»»»  »1 
tinue  to  be  paid         ^  "'P""»  """^^  <»'•''"»  « 

Again,  London  is  broiiirht  intn  fi,„  . 
cause  the  New  ^'nrt  K     i  ^  transaction 

;ant  to  p't^;inTa^?:::rLrir„r,;;:::  ■ 
feme  s:r„r  ^''"  ""t  •'' "  -  ^" 

letter  of  ere,bt  ther!^,'^ f  "'""'  ""*■•  *  ««t-d, 
New  YorkBvZC'^'^'r  «^«"^"t  ">arket 
London  »  Parfs    1  thf t"^  "'  r"''^''  P"'"*'  ^-^h 

.•^-.to,oa„;p,trcc;:i^^ 

con^lrSn':rnri;::^:UeT''-'"^^^^^^ 
n.net,..day  bills  bv  the  expLr;  '  F:r  StTof  tJ' 
usance  he  irets  of  nn..i.e^  •  ,  ararts  ot  tha 

than  if  thSXf"  we;e  d^™  r^r^'''^^^''''''^ 
remittances  are  made  from  bZ  /•''''*•  "^"^  * 
-and.  the,,  must  ^rlirtZlfZZ^'T' 

rrct'e;rr^-'-^^^^^^^^^ 

rtifferenee  represent 'rt       •    "  '  *'  ""'•    '''« 


action  be- 
floes  not 
ave  some 
to  draw 
irst-cJass 
larket  in 
.  such  as 
ker  here 


FOREIGN  EXCHANGE  OPEUATIOXS  511 

.311.  niiere  the  advance  is  actually  made.— A  third 
•lucstioii  often  asked  in  connection  with  export  letters 
(.f  credit  is  as  to  who  does  actually  put  up  the  money 
winch  the  exporter  receives  at  the  time  the  shipment  is 
niadc.    The  answer  is  that  the  money  comes  from  the 
k'reat  discount  market  in  London,  which  absorbs  the 
I  lo.i^r  draft  drawn  under  the  credit  by  the  exporter.    Di- 
rectly he  has  drawn  this  draft  he  sells  it  in  the  exchange 
market  for  dollars.    The  d    ft  is  then  sent  to  London 
and  discounted— that  is  to  say,  an  amount  of  money 
equal  to  the  face  value  of  the  draft,  less  only  the  amount 
of  the  discount,  is  credited  to  the  account  of  the  New 
\'ork  banker  who  bought  it.    It  is  from  the  great  dis- 
count market  in  London,  in  other  words,  that  the  money 
actually  comes. 


m 


'4i 


iff 


•f{ 


f) 


ill 


CHAPTER   VII 

STERLING   EXCHANGE 

342.  Great  Bnto«._Tl,e  monetary  unit  of  G 
JlntaM.  ,s  H,c  .,oveiei«n  or  pound  sterling  equal  t 
dnllings     One  shilling  equals  12  pence  and  Ine   ' 
equals  4  farthings.    The  mint  value  of  the  pound 
Zm.  '  ""''  ""  ■"'"*  ™''"=  °f  ">«  dollar." 

In  actual  practice,  conversions  are  generally  m 
w,th  the  a,d  of  exchange  tables,  but  eviy  o^™t" 
exchange  ,s,  of  course,  able  to  make  the  neceTrv 
s™»  'Z'"",,'™""    1"  """''"«  -"versions  nTJe 

To  convert  English  money  into  dollars,  multiplv  1 
amount  by  the  rate  of  exchange:  thus  ^440  a    S4« 
=  440X  4.8525=.$2135.I0.    When  ttellg  am™ 
c'on  ams  shillings  and  pence,  reduce  them  toVeS™ 
of  the  pound  before  multiplying.'     To  convert  A 

^DfcimaU  of  a  pound: 

'^^^^i^'^''^^ST.^^Lrrm^%if^' ^',\^--^-  Multiply 

£1  =  1.  ^        *•     ^ "^  "***<"»  »'  thw  is  apparent: 

l.s  =  .05  of  a  pound. 

l«l=004I6(lofapoundor.004i. 

by  f :te,r:„'c"™S  if-..^  ;rr  st.::  ^'~';r"*  •"  >" 

Lxampio:  i»cnc,  and  two  if  over  thuty-two. 

Reduce  £1.5.8,  7d  to  pound.s  and  decimal: 

.0.>X8. .  '5. 

.00»^X7....      *<>   . 

.W9J 


5n 


S'l'KKLING    EXCHANGE 


lars 


513 

into  sterlin^r.  divide  the  amount  in  dollars  and 
ants  by  the  rate  of  exchange.  How  many  pounds  in 
,5213.5.10  at  $4.8525  =  'i'*  'o  =  £440 

J.e  calcu  ations  in  both  cases  are  simple  arithmetic, 
.nul  need  not  be  worked  out  in  detail  here.  The  calcu- 
lations frequently  permit  of  cancellations  which  mate- 
rially  shorten  the  work. 

Tlie  large  majority  of  the  foreign  exchange  transac 
t.ons  m  New  York  are  with  London,  and  it  is  to  be 
carefully  borne  in  mind  that  althougl,  the  rates  (,f  ex- 
change  between  the  two  countries  are  goverr.ed  by  the 
market  cond.t.ons  of  both  countries,  it  is  a  significant 
act  that  practically  all  exchange  transactions  emanate 
from  th.s  side,  and  the  rates  of  exchange  are  therefore 
fixed  m  ^  ew  York.    The  exporter  here  prefers  to  sell 
h  s  bdl  and  obtam  ready  money  and  a  speedy  turnover 
of  capital  rather  than  to  await  a  remittance  from  Eng- 

The  importer  here  who  has  bought  goods  abroad 
wouh  rather  remit  for  them  to  the  foreign  exporter  th!n 

an  bargain  for  as  low  a  rate  as  possible,  while  in  the  lat- 
er lie  would  have  to  pay  the  rate  fixed  by  a  bill  broker  in 
I^ndon  who  has  not  the  same  interest  in  the  transac- 
t'on.  It  might  be  thought  that  the  London  exporter 
and  importer  would  object  to  letting  the  merchants 
here  have  their  own  way.    On  the  contrary,  it  appears 

troX^Xr  ^"^'  '-'  '  '--  ^  --"'^  ---  «^ 
343.  Making  a  mf^.-Practically  all  exchange  busi- 
ness m  sterhng  is  transacted  by  cable  and  by  demand 
an  sixty-day  bills,  and  quotations  are  geneLll  fur' 
n  shed  accordingly.  Occasionally,  however,  it  is  neces- 
sarj  to  make  a  quotation  on  some  special  dating,  such 

I— VIII— 33  ° 


^14 


ifP 


II 


I'OUKIGN    KXCIIANGK 


i 


as  thirty  or  ninety  days,  and  it  will  therefore  be  us. 
to  show  how  this  is  done. 

The  demand  rate  is  the  base  from  which  the  dec 
tion  for  interest,  stamps,  etc.,  is  made.  The  follow 
will  show  the  difference  of  time  between  the  differ 
bills  und  the  stamps  reipn'red: 

Three  days'  sight  (3  d/s) ,  one  penny  stamp,  six  dt 
interest  on  demand  rate. 

All  bills  drawn  for  over  three  days'  sight  incui 
stamp  duty  of  is  per  £100  or  A  of  1  per  cent,  wh 
must  always  he  taken  into  consideration  in  figuri 
value  of  time  bills. 

Fifteen  days'  sight,  eighteen  days  interest  off  dema 
rate,  and  stamps;  thirty  days'  sight,  thirty-three  days 
demand  rate,  and  stamps. 

Sixty  days'  sight,  sixty-three  days  interest  off  ( 
mand  rate;  this  is  also  called  the  usance  or  customs 
time  on  bills  drawn  between  the  New  York  and  Lond 
market;  a  seventy  days'  date  bill  is  often  used  as  ; 
equivalent. 

In  all  exchange  transactions  the  rate  of  interest 

always  governed  by  the  rate  obtaining  in  the  count 

where  the  bill  is  domiciled,  so  that  on  bills  drawn  ( 

Great  Britain  the  Bank  of  England  rate  and  Lond. 

market  rates  are  used  in  these  calculations;  the  Bai 

of  England  rate  also  governs  the  ^  ite  of  interest  pa 

by  the  London  joint  stock  banks  on  deposits,  that  beir 

generally  Ih  per  cent  below  the  Bank  of  England  rat 

This  fact  is  mentioned  because  one  often  sees  bills,  wil 

documents  attached,  going  forward  with  instructions  \ 

accept  payment  "under  a  rebate  of  }  per  cent  above  ral 

of  interest  allowed  on  deposits  by  joint  stock  banks," 

the  bank  rate  was  4  })er  cent  the  deposit  rate  would  t 

2i  per  cent  and  the  rebate  rate  3  per  cent.    As  pointe 


SIKHI.IMi    i;X(IIAN(JH  4,4 

",'"  '"  '["'■'f""'  \^"'  ^'"■•k  Roverns  ti.e  sterling  e.- 

:' I-";"'.  ""»  ^Mt-ent.  and  both  Canadian  an,l  An.er. 

"" '7"""'^'^  "^'  ■'"»«<  on  the  Xc.w  York  ,,uotati„, 

,n,  ««,!  „r  dec-re„,cHi  .,y  t|,e  pre„,iun,  or  dLnnZ 
N  "  ^  ork  fund,  and  other  l.K-al  c.nlinKcncics. 

Quota  ,ons  for  sterling  a,-e  Kenerally  quoted  by  ad- 
.m.«_of  five  cents  per  £100,  thus  4.8ni,  4.81lLnd 

Si«l.t  drafts  one  penny  stamp,  no  days  of  grace. 

( able  transfers  require  no  stan.p;  the  difference  V 

"-«,  cahe  and  demand  rate  varies  from  one-sNtLth 

l.>"..e-e,ghth  above  the  rate  for  banker's  demand" 

r.;,.rese„  ,„g  the  interest  on  the  time  between  the  ^™  pi 

n     d  X  ft    71"  "'"'  ""  ^^^^'P'  "'  London  of  He' 

1  "I.    The  time  would  vary  from  six  to  ten  days  ac 
omling  to  steamer  sailings.  " 

are  published  by  .ome Tf  ihe  fe^™^  ™k '" 
™l  b.v  others,  it  is  just  as  well  tX  at  "nS  p^de^n" 

luhte'tr'r  '■?  ™"™"'™^-     "  ''  euSarv  to 
«c„la  e  the  .nterest  on  the  basis  of  £100  =  $483 '  the 

*.la„on  resolving  itself  into  one  of  simprliter! 

Sixty-three  days  at  .t  per  oent  on  $485  =  Mx3x«  _ 
?2.5M.3  per  £100.  i«ox3M    — 

This  of  course,  can  also  be  figured  out  on  the  ordi- 
ly  interest  tables.    With  demand  rate  at  486.4«!  ma  - 

"ueted  (.24  cents  r>fr£wT=maM         """"'  '" 


rtW 


l'OHi:iGN    KX(IIAN(JK 


For  those  who  have  not  a  convenient  tahle  for 
caleulations  the  following  httle  tahle.  represent!.! 
interest  on  $485  at  1  per  cent  for  the  respective  nu 
of  (lays,  IS  useful.  Ry  means  of  this  a  small  desk 
can  he  made  out  at  the  current  discount  rate  in 
(hm  hy  simply  multii)lv;„g  l,y  the  rate  per  cent 
tahle  at  3  per  cent  is  appended  as  an  example: 


Days 

days 


£100  at  1;?      XlOOatS;^ 


3 

10 
18 
30 
33 
45 
03 
03 
123 


Wit 
Stam 


.64 
.96 
1.33 
1.55 
2.031 
2.75J 
3.941 
5.14i 


.039,803  .120 

.132,876  .399 

.239,178  .718 

.398,028  1.196 

.438,498  1.315 

.597,941  1.793 

.837,118  2.511 

1.235,746  3.707 

1.634,374  4.903 

In  the  above  the  calculations  are  carried  out  fan 
than  necessary.  The  mills  may  be  neglected  and  a  ( 
added.  By  combining,  the  interest  for  almost  any  ni 
her  of  days  may  be  found :  for  instance,  three  days'  si 
(six  days)  at  3  per  cent  =  2x.i20  =-  .240.  Always 
member  to  add  stamps  afterwards. 

Great  Britain  and  Canada  are  the  only  two  count 
of  importance  that  figure  interest  on  the  awkward  bj 
of365days.» 

l!  in.^«  "  1  '''•  ^"''  "'  '''""  '"'""^^^  .alrulations.  except  that  if 
par  o'VsC  "'  "' mT"  "T^'Y''''-  theoretically  and  practically,  the  1 
par  of  4.8C3   would  have  been  the  best  rate,  theoretically  becau«,  it  o«n. 

«  multip^  of  73  which  form,  an  awkward  factor  of  365  in  «lculatmg  inter«K 
il  O"  «  ha,„  of  iMl  wc  get  the  following  rule:  Multiply  the  nu„ 
of  days  by  the  rate  per  cent  and  divide  by  73.  f  J'  wc  nuu 


It'  feu-  tlicse 
'ser)tin|^  tlie 
ive  number 
I  desk  table 
ite  in  Lon- 
r  cent.  A 
e: 

With 
Stamps 

.641 

.060 
1.838 
1.557 
2.036 
2.753 
8.949 
5.145 

ut  farther 
md  a  cent 
any  num- 
lays'  sight 
dways  re- 
countries 
mtd  basis 


0  sterling  was 
it  that  it  ua 
ally,  the  legal 
96  it  occupiM 
luse  4.86}  is 
ig  interest  by 
'  the  number 


517 


A  IVu  c.xa«.,,le.s  ilh.stratin^r  the  n.elho<Is  of  calcuht- 
iDiis  may  he  of  interest.  '-""-uia 


(1(11 
bill. 


(iiven  the  demand   rate  as   485.40.    :m<l  the   I. 
M  .lisconnt  rate  at  .04J,  find  the  value  of  a  sixtv-c 


on- 
xty-day 


Dtniand  rate ah-  m 

..     ,,„  ,      , '  •  •  48.>.40 

^^     «3days  interest  at  .04«'..  4.OO 

^ta"'l> *      .24 


481.07 

Vahie  of  60.day  hills 7^ 

the  nearest  commercial  quotation  to  4.8107. 

If  Xew  York  funds  in  Canada  were  at  1/32 

r^^^Vit'^r "7  -te  would  he  .$481.07  plu! 
•«  J  — .154.8122  or  108{  plus  1/32- 

Find  the  cahle  rate  from  the  demand  rate  4  8540 
■'.terest  at  .041  for  ei^rht  days.  * 

Thus:   «.,  days  at  3%  on  48e.6flf.  worked  by  thi,  rule,  give. 

Tin.  k  of  eoun..  .„„  than  the  inte«.t'Lkoned  o„  W.85  by  -1  of  it«.f. 
Interest  on  486.66  :=«  ,,  ** 

,„, .  .  Approximate  interest  on  W .  85  =.  2  5116 

rh.s  .s  conect  to  the  oue-tenth  part  of  one  per  mill. 

Proof.  de.luct  the-i_thpart-«22« 
10.000     '^      $2.5113 


$2.5113 


Actual  interest 

-  a  £.  ..«sis.  sumps  wZj  ro^24:;u  •  "  ''•'  '''^'''  •"'  »-"  '-'"'^"^ 

«^t,  ,.,.r  £100.  '  '  ^'  *""  """^  ^^'  "--Pec-t.vHy.  for  £10.000  or  08.  15.  23  and  31 


.118 


ii 


i 


f!. 

I 


Driii.iriil  i;j|r 

»  »1"nV  iiitcifst  at  .Oil. 


.50 


" '-•"Ho/./tv^T, ;"';'?""•;■••■;■■■■ '"■'^ 

'"'"k  "ill,  ii,  I ,  "l,„     ""'""'""I  «rr«n«e.„ei,t  of 

drawn  out  of  Great  Britain  ^"^  ' 

The  days  of  grace  are  three. 

iJr  hi.:  If::  zi'i-,-  ^''"•'  <"  ^«'"  <^™ 

after.  """^  ''"'"'"J-  "e  I.ai.1   the  , 

are^lflXTe:r^''^'^'"-^''>-«<»-'FH« 

4tt::;^:j:;'r;^:;;f,:--o„thatthi. 

Interest  is  ealeulated  by  takin"  ,? '"*' '"°"'''- 
d«ys  and  the  year  at  .%o  davf    *"  '"  ''"''  ""■»•>*' 

a»  the  «rst^::Er,  ft    tr'"'  ^'^'^  "">"''  * 
counted.  '""^'  currency  to  he  redi 

™te'f?l~r:::t^t:>'''r•'^"'''■«'< 

to  the  element  of  risk  ^  „'         .    !  """'''"*  '"'"^-  ""'"l 
Of  rate  O^r^^t^i:^^^  --"'«  ^'■•- 

'™""  ""  '•'"««»'•  l-n»»  outride  London  .„ 


STKRLING    KXCIIANGE  sm 

gtiicrally  worth  oiie-quarttr  cent  per  ikhhkI  less  tlian 
London  bills  on  account  of  collection  charges,  etc. 

Hills  drawn  on  British  colonies  hearing  the  clause 
"uith  exchange  and  all  stamp  <luties  for  negotiating 
l.ills  in  Lontlon"  added,  are  usually  on  the  same  footing 
uith  bills  drawn  on  London. 

Hills  of  exchange  drawn  on  continental  points  are 
worth  from  one  to  two  cents  less  per  pound  than  simi- 
lar bdls  drawn  on  London,  according  to  distance,  etc. 
If  such  bills,  however,  l)car  the  clause  "payable  in  Lon- 
don" or  "in  London  exchange"  they  are  usually  on  a 
j)ar  with  bdls  drawn  on  London,  plus  any  extra  cost  of 
])()stage  or  commission. 

All  endorsements  must  be  in  ink  and  signed  in  full 
as  English  banks  do  not  rccogm'ze  stamped  endorse-' 
incuts.  Endorsement  should  be  made  exactly  as  the  face 
of  the  check  calls  for.  .Mrs.  Kllen  Smith,  for  instance, 
sLould  endorse  "Ellen  Smith";  Mrs.  John  Smith  should 
endorse  "Ellen  Smith,  wife  of  John  Smith." 

In  making  a  rate  for  a  maturing  collection  drawn  on 
C  anada  m  sterling  or  foreign  currency,  whether  received 
dnect  from  the  drawer  or  through  any  Canadian  bank, 
care  should  be  taken  to  see  that  the  rate  is  higher  than 
the  demand  draft  rate  for  the  day,  on  account  of  the 
extra  work  involved  in  collecting.    The  rate  should  be 
sufficiently  high  to  reimburse  the  collecting  bank  its  ordi- 
nary commission.    The  drawee  sometimes  considers  the 
question  settled  by  offering  in  paj-ment  a  demand  bank 
Uratt  for  a  similar  amount  in  sterling,  which  is,  of  course 
an  untenable  position  to  take. 

In  Great  Britain,  as  well  as  in  most  foreign  countries, 
a  check  whether  drawn  payable  to  bearer  or  order  is  paid 
without  identification,  reasonable  caution  alone  being 
•'"td.    A  bank,  for  instance,  would  naturally  make  in- 


520 


FOHi:i(i\    KXCIIANGE 


Muiries  if  a  tramp  presented  a  el.eek  n.r  a  lame  a.„o, 


and  Co. 


^*^  '^"*^'^'^'  i"r  instance,  crossed 

"Bank  of  Montreai,!;;,;;;;;;^;;^;;^ 

must    be    presented    tlirougl,    that    office       auu 
crossed  checks  are  pennissible  i     r«,     i  ,*'''"«' 

;i;^;™sofKxcha!;,e2r:;c^^^^ 

"order"  check  ^  *''  Canadian  banks  for  a. 

^e  attached:  if  ins/nt::  ^   X"^^^^^^ 

sJ)onld  state  this  in  the  h.n       p\  '  *^^  ^"stomer 


STERLING    EXCHANGE 


521 


e  amount, 
ould  have 


J  pay  the 
er  bank, 
over  the 
the  per- 
e.     This 
ing  that 
heck, 
only  be 
d 


Uiits  are  in  pcrlVct  <.i(lcr.  This  is  important  not  only 
|l)icaiiM'  of  the  risks  involved,  but  on  account  of  the 
txtra  trouble  imposed  upon  correspondents  by      -  irreg- 

Inlarity. 

All  letters  enclosing  drafts,  etc.,  with  docun.ents  at- 
[taclRd  should  I  ,'  signed  only  after  a  careful  inspection 
lias  heen  made  of  the  endorsements  upon  the  drafts, 
I  hills  of  lading  or  other  documents,  particular  attention 
l)tiii«'-  directed  to  the  instructions  given  regarding  the 
I  disposition  of  the  documents  and  treatment  of  the  bill 
I  in  the  event  of  the  non-arrival  of  goods. 

From  the  fact  that  at  par  (4.86.Si),  £15  is  equal  to 
|X7.'J.  the  following  rules  may  be  deduced: 

'()  eonvert  sterling  to  dollars  at  par  rate,  multiply  the 
iimoniit  by  }}. 

To  convert  (h)llars  into  sterling  at  par  rate,  multiplv 
the  dollars  by  H.  ^ 

Ir»  every  exchange  table,  whether  specially  compiled 
for  Canadian  (luotations  or  not,  the  dollar  value  of  £225, 
or  rather  £22.50,  at  any  rate,  will  give  the  Canadian 
c<|m\alent;  for  instance,  we  look  up  the  value  of  £225  at 
4.8.)  and  we  get  1001.25,  or  for  £22.50  =  109.125  or 

To  get  the  absolute  value  of  a  shilling  or  shillings  at 
any  rate,  multiply  the  number  of  shillings  by  five,  and 
look  up  the  dollar  value  of  that  result  as  pounds:  thus 
lis.  at  109i  equals  by  rule  75  or  15  x  5;  £75  at  10? 
!  e(|iials  303.75,  therefore  1 5s.  at  109i  =  $3.6375  exactly. 
UC>.  Foreign  exchange  hookkeepinfr.  —  AWhoxi^h 
practically  every  branch  of  a  Canadian  bank  can  issue 
•halts  on  London  and  European  correspondents,  only 
the  larger  and  more  central  branches  carry  foreign  ac- 

'  Tl,..  nason  for  this  is  simple;  283  is  n  multiple  of  <i\i,  referre.1  lo  in  f  lie  nppen- 

oix  '■<  .iti.niiaii  QiKifationn." 


FOREIGN    KXniANGE 


mints  and  act  as  tlcaiin^r  l,o„.sts  lor  the  foreign  1 

ness  of  the  smaller  and  neighhoring  branches.     I 

day,  or  as  frecjuently  as  necessary,  a  bulletin  of  net 

thange  rates,  at  whicli  both  time  and  sight  drafts  ma^ 

debite<l  or  credited,  is  sent  these  branches  by  the  ceri 

branch.     A  small  l)ranch  has  little  or  no  injokkeei: 

to  do  ji  connection  with  its  foreign  exchange  tran 

tions.     On  issuing  a  draft  on  London,  for  instanc 

small  branch  would  credit,  through  branch  cleari 

with  particulars,  its  nearest  central  office  at  the  bull* 

rate,  and  that  office  would  confirm  the  draft  to  the  ( 

responde'.ts.     If,  on  the  other  hand,  a  sight  or  time 

Mere  purchased,  the  item  would  be  Included  in  the  chi 

list  for  the  day,  and  credit  would  be  received  throi 

branch  clearings  in  due  course  from  the  central  offi 

In  the  case  of  time  drafts  the  purchasing  brc  :ich,  he 

ever,  should  record  the  liability  against  the  obJgant  i 

til  the  draft  is  retired. 

The  method  of  keeping  accounts  with  foreign  cor 
spondents  whether  in  London  or  other  European  cent< 
IS  very  simple.  It  necessitates  a  special  ruling  in  t 
general  ledger  to  accommodate  foreign  currency  (Fi 
lire  85) .  As  a  matter  of  convenience,  a  uniform  rate 
conversion,  generally  par,  is  used  for  bookkeeping  pu 
poses.  The  difference  between  par  and  the  price  at  whii 
the  item  is  purchased  or  sold,  is  debited  or  credited,  as  tl 
case  may  be,  to  foreign  exchange  account. 

A  consideration  of  the  London  account  will  serve  i 
an  example.  The  book  conversion  in  sterling  is  mat 
at  4.86^  or  9i  premium,  Canadian  quotations. 

A  check  for  £1,000,  for  instance,  is  purchased  at  4.8; 
The  London  account  is  debited  with  £1,000  in  the  stei 
hng  column  an<l  with  $4,866.66,  the  par  conversion,  ii 
the  dollars  coIuiilm.     The  difference  between  the  latte 


STKKLIN(;    KXCHANGE 


523 


and  the  piirchasc  price  .$!«.(»(>  is  crcdilud  lo  foreign  ex- 

'I'lu'  actual  value  of  the  London  balance  at  any  time  is 
lasily  ascertained  by  converting  the  sterling  amount  of 
till'  account  at  the  market  rate,  and  the  <lifference  be- 
Unvn  this  and  the  dollar  balance  added  to  or  deducted 
fntni  the  balance  at  the  credit  of  "foreign  exchange,"  will 
•rive  the  net  i>rofit  of  the  sterling  business  to  date.  In 
hiaiK'hes  where  long  ppper  is  bought  and  sold,  the  vari- 
ous outstanding  unmatured  items  must,  of  course,  be 
i(|iiatcd  on  a  dt.nand  basis  and  the  result  figured  at  the 
iiiaiket  rate  as  above.  In  addition  to  the  special  ruling 
ill  tlie  general  ledger  two  or  three  specially  ruled  books 
are  recjuired: 

1.  A  check  register  for  checks  and  sight  items.  This 
contains  columns  for  the  necessary  ])articulars  and 
sj)ecial  columns  for  rates  sterling  and  dollar 
amounts. 

2.  A  register  of  documentary  and  time  bills  pur- 
chased, the  ruling  lieing  similar  to  that  shown  in 
Figure  8(),  the  headings  of  which  are  self-explan- 
atory. 

.'{.  A  register  of  bills  of  exchange  sold,  both  time  and 
demand.  Time  and  demand  bills  should  he  en- 
tered separately.  A  form  similar  to  Figure  17 
is  satisfactory. 

Tliese  books  are  sometimes  in  the  form  of  bound  regis- 
ters, but  many  banks  are  using  loose  leaf  forms  entirely, 
letniiiing  the  duplicate  and  sending  the  original  to  the 
correspondent  with  the  item,  or  as  the  advice,  in  case  of 

drafts. 

In  branches  where  much  foreign  business  is  transacted 
tJK  re  are  gejierally  three  accounts  in  the  general  ledger 


lii 


:i 


c 

c 


STKHLINC,   KXCHAMJE 


5'i5 


k(|)t    within    lliu    L«)iKh)i»    bruiicli    or    corre.spoiuleiit, 

iiaiiii'ly: 

Cash  account 

Bills  of  exchange  |)urclmsc(l 

Hills  of  exchange  sold 

A  |)r()fit  and  loss  account  called  "foreign  exchange 
jiicMiiiit"  is  also  kept. 

;U7.  Drafts  f/zYmr/.—  Demand  drafts  drawn,  after  be- 
iiifT  t iitircd  in  the  drafts  register,  are  credited  in  total  to 
tlif  London  cash  account  through  the  cash  l)(K)k.    If  the 
drafts  are  drawn  payable  at  any  longer  term  than  sight 
tluv  are  credited  in  the  same  way  to  bills  of  exchange 
Mild.     The  totals  of  the  cash  book  in  each  instance  are 
paiml"  at  Oi.    The  difference,  debit  or  credit,  is  car- 
ried into  foreign  exchange  account  and  the  sterling  and 
c'lirrciK'y  amounts  posted  into  the  general  ledger. 
I     .'U8.  liUh  of  cjcchansrc  purchased. — Demand  items 
iiridtr  this  class  are  debited  each  day  to  the  cash  account; 
tiiiK'  hills  of  exchange  to  bills  of  exchange  purchased. 
Tiiey  are  registered  separately  for  convenience  of  advice; 
also  lor  the  purpose  of  marking  off  in  the  adjustment. 
Totals  are  "parred"  as  above  and  carried  into  tlie  cash 
lMM)k.     Demand   bills  of  exchange   purchased  are,  of 
idiirsc,  not  diarized  except  in  so  far  as  keeping  track 
of  the  steamer  arrivals  is  concerned.     This  is  an  esti- 
mate of  the  probable  balance  of  the  cash  account  in 
l.«n(l(»n  based  on  the  steamer  arrivals.     All  time  bills 
nr  ;|iari/ed,  the  date  of  their  presentation  being  closely 
istiiiiated.     The  arrival  of  the  steamers  and  the  ajurse 
of  till-  hills  after  arrival  in  London  is  so  regular,  that 
tlio  date  of  maturity  is  seldom  in  error. 

^^     II  these  bills  are  rebated,  or  discounted  in  the 
maik(  t  on  account  of  the  remitting  branch,  the  fact  is 


A^iCi 


I'OUKIGN    EX(HAN(;i': 


imiiic'diiilc'ly  advised  by  London,  and  a  rash  Iniok  en 
is  made  crediting  l)ills  of  exeliange  purehased  and  del 
ing  Lon«'on  cash  aeount,  tlnis  offsetting  the  credit  wli 
London  makes  when  the  hill  was  discounted  or  rebat 
The  item  is  also  marked  off  the  diary.  Bills  purcha 
are  also  recorded  against  the  customer  in  his  liahil 
ledger  account  hut  are  not  marked  off  there  until 
hill  is  actually  paid.  Statements  are  sent  from  the  Li 
don  correspondent  every  week  and,  as  soon  as  possi 
following  its  receipt,  a  complete  adjustment  of  the  th 
accounts  is  made,  the  outstanding  items  represent! 
amounts  in  transit.  Any  items  outstanding  an  undi 
long  time  are,  of  course,  investigated.  In  order  to  si 
time  the  acceptance  or  non-payment  of  items  is  invf 
ably  advised  by  cable. 


C'lIAPTKH    VJIl 
CONTINENTAL  EXCIIANCiE 

im.  Latin  Ionian  cnNtitrics.—h\  France.  Belgium 
iiikI  Su it/eiland  and  all  French  dependencies,  the  franc, 
"liicl.  is  the  monetary  unit,  is  equal  to  100  centimes! 
T!i(  unit  in  (ireece,  the  drachinn,  is  equal  to  100  kpta. 
Tlio  unit  in  Italy,  the  lira,  h  vi\\m\  to  100  centeffirni. 

The  value  of  the  franc,  drachma  and  lira  is  19.3  cents 
'»r  .).1H!  francs  to  the  dollar. 

The-  Latin  Union  was  formed  for  the  adoption  of  a 
timlorin  monetary-  system  comprising  France,  Helgium, 
Suit/trland.  (Jreece  and  Italy. 

TIr"  free  circ.dation  of  gcid  and  silver  coins  issued 
l>y  llu  countries  named  was  ratified  at  a  convention  held 
at  Paris  in  November,  1893,  so  that  the  gold  and  silver 
("HIS  issued  hy  each  of  the  above-named  countries  were 
|iTai.tnl  free  and  urdimited  circulation  at  their  face  value 
111  tlu-  .ountries  forming  the  Latin  Tnion. 

Tlie  Italian  silver  coins  of  less  than  five  lira,  however, 
were  excluded  from  this  arrangement,  as  were  also  cop- 
I'lr  (cms  and  paper  money. 

Tli,  following  ..ountries  have  a  decimal  coinage,  prac- 
I"  'Ily  Kjinxalent  in  face  value  to  tho.sc  r.)rming  the 
1-atiii  riiion: 

Hiilnaria:  hva  or  Icxc  ecjual  to  100  stotiuhi. 
Hnimiania:  hi  ecpial  to  100  hatii. 
I'inlaiul :  murk  equal  to  100  pcnni. 

527 


o^M 


FOIlEIGxN    EXCHANGE 


1 1 


'ii 


Servia:  dhiar  ecjual  to  100  poras. 
Spain:  pcttcla  ecjiial  to  100  ceutimes. 

Consequently  a  study  of  French  exchange  opera 
will  practically  cnihrace  all  these  countries. 

350.  /'Vrtwtr.— France  is  not  only  the  principal  r 
l)er  of  the  Latin  Union,  hut  the  one  with  the  gre 
amount  of  exchange  transactions  with  Canada, 
change  rates  are  quoted  in  Xew  York  and  Canac 
terms  of  hoth  currencies,  the  mint  par  value  being  It 
cents  or  19.3  cents,  as  it  is  commonly  reckoned, 
dividing  19.3  cents  into  $1  we  obtain  the  value  of  a 
lar  in  francs  5.18134,  which  is  quoted  as  5.18J.* 

The  cent  quotation,  however,  is  only  used  in  minoi 
change  operations  and  for  drafts  drawn  on  small  tc 
in  France,  all  the  large  transactions  in  Paris  being 
ducted  on  the  franc  quotation  per  dollar. 

Conversion  in  the  former  is  simple.  For  exam 
find  the  cost  of  a  draft  for  672  francs  (a  .198  cents 
franc:  072  X  .193  =  $129.70. 

How  many  francs  can  be  purchased  with  $800 
.192  cents  per  franc? 

800  ~  192  =  francs  4166.66 
It  will  be  noted  that  all  the  other  exchanges  que 
on  the  Xew  York  market  are  on  a  basis  of  dollars  i 
cents  per  foreign  unit,  consequently  the  higher  the  c 
quotation  the  less  francs  received  for  any  given  sum,  i 
the  dearer  the  exchange,  thus 

$800  Oi  192  ---^  francs  4166.66 
Oi  193-^  4145.08 

This  form  of  quotation  is  seldom  seen  in  the  papers,  a 
is  used  principally  in  bank  and  express  counter  quo 

'  The  exact  value  of  the  dollar  found  by  d  iding  the  weight  of  pure  gold  ( 
Umrd  in  the  franc  with  the  pure  gold  conta'  J  in  the  dollar  is  fcs.  5.18M 
Section  351).    5.18J^  and  .193  are  the  two  par  values  used  commerciaUy. 


CONTiNKN'l'AL    KX('IIAN(;i: 


MO 


ti..ns.  In  the  franc  (|u«)tation  per  dollar  the  effect  of 
ati  a.lvance  is  the  reverse;  a  rising  rate  means  eheai>er 
cxcliMMH^e.  In  making  rates  for  Canada  from  New  York 
(|U()tations  care  should  he  taken  to  make  the  necessary 
allouanee  for  the  exchange  rate  k-tween  Montreal  and 
^(^v  York.  In  ajnverting  the  franc  quotation,  dis- 
cniiiits  should  he  added  and  premiums  deducted. 

.T)!.  The  franc  qiiolation.—'Vhis  method  of  quotation 
is  \cry  confusing  at  first,  owing  to  its  l)eing  the  reverse 
of  the  usual  exchange  (juotations— foreign  units  for  dol- 
lar, instead  of  dollar  value  for  foreign  unit.  The  first 
lesson  to  he  learned  is  that  the  higher  the  quotation  the 
lower  the  exchange;  in  other  words,  the  higher  the  quo- 
tation  the  more  francs  received  for  a  dollar.  For  in- 
stance, $1,000  at  5.18i  would  purchase  francs  3181- 
.2.3,  while  this  number  of  francs  at  5.22  would  only  cost 

Vrimc  (juotations  advance  by  5  centimes;  thus,  5.1 8i, 
.'>.1H/,  .5.19-',  5.20,  etc.  It  will  he  noted  that  as  there' 
arc  five  francs  to  the  dollar,  therefore  •'  centimes  ad- 
vance on  five  francs  is  i  centime  advance  on  one  franc. 
I'or  all  ordinary  transactions  this  difference  of  i*  of  a 
centime  is  sufficient,  but  in  large  transaetbrts,  necessitat- 
in^r  dose  quotations,  the  shading  is  effected  by  increasing 
or  decreasing  the  quotation  by  sixty-fourths  •  these  frac- 
tions are  quoted  plus  or  minus,  although  most  frequently 
■"■'ins,  and  always  apply  to  the  dollar  amount.  The 
toll..u  n.g  table  shows  the  value  of  the  dollar  at  5.18i  to 
.5. IS;  with  the  various  fractional  shadings: 

Cents 
.193,003 
.193,033 
.193,063 
.193,094 


ipers,  and 

Cents 

er  quota- 

a.lSi 

.193,003 

pure  gold  coo- 

5.\Hl-ij 

.192,973 

i.  5.I8M(m 

-^■r 

.192,943 

lercially. 

:i 
<-\  111—34 

.192,918 

5.181  4-  TrV 

-t.     3 


ii 


Uf 


^•*»  lOltKiGN    1:XC1IANG1': 

(Vnls  Q 

-A      .lJ)2.H.5;i  ^^«^       ,j,; 

"V      •l'»^'«^3  +nV      .10; 

.^».1HJ  .102,771  5.m  .i». 

5.1H,'  -,',      .lj)2.7K)  5.18i'+..V      .19: 

It  will  hf  stcn  that  these  Iractioiuil  deductions 
U(hlitn)ns  are  made  on  the  dollar  priee. 
Find  eost  of: 

(1)  r>.()00  fes.  0,  .3.18' 

(2)  .3(M)(M)  I'es.  0,  5.IH.'  -^.V 
(;i)    ,30.000  fes.  r^r,  .5.18:+  A 

( 1 )  0.000    :    .3.18i =.^65  02 

(2)  .50,000   fes.  -= $9,650.20 

less  «^4^  of  11^ I  55 

."iO.OOO  fes.  r,/  .5.18i-,;V      $9,048.65 

(3)  .50.000  fes _  $9,650.20 

add  T;\  of  l-r 4  50 

50.000  fes.  r?7  5.1HJ+A  .$9,654.70 
Find  the  nund)er  of  francs  that  can  be  purchased 
$1,000  at  the  same  rates. 

(1)  $1,000  ru  .5.l8i  --  .5.18125  x  1,000  -=  fes    5181 

(2)  $1,000  (a  5.18i  -  ,V .-fes    5181 

add  ^V  "f  1 '/  of  $1 ,000       1 6  cents      ....     fes. 

$1,000  0,  5.l8i-A =.-  fes    ^ 

(3)  $1.000rr,5.18i  + A fes.'  5181 

</t7/Mf  /  A  of  1  r^  =  47  cents.  f^s.        2, 

$1,000  (^,   5.18!  4  A -  fes.  5m 


CONTINENTAL    EXCHANGE  5S1 

Note  that  where  tlic  fractional  rates  of  plus  or  minus 
arc  used  they  apply  only  to  the  amount  in  dollars; 
tlim  fore,  in  converting  dollars  to  francs,  if  the  fraction 
is  phi.s.  less  francs  will  be  given;  if  the  fraction  is  minus, 
moif  IraiK's  will  l)e  given. 

In  the  example  (2)  the  minus  fraction  is  sixteen  cents 
...I  the-  dollar  anMHint  of  $1,000  equivalent  at  the  rate 
J.IMi  to  82  centimes,  which  are  added  to  the  franc 
\nhw.  In  example  (3)  the  plus  fraction  is  deducted 
fioni  the  franc  value.  These  peculiar  features  of  the 
franc  (piotation  should  he  thoroughly  grasped. 

352.  Time  fei7/».— Quotations  for  time  bills  drawn  on 
FnuKc  are  arrived  at  by  adding  tlie  interest,  stamps, 
etc.,  to  the  demand  rate. 

The  stamps  are  irs  of  1  per  cent  or  26  centimes  per 
I'rancs  520. 

The  interest  is  calculated  on  a  basis  of  520  francs  to 
the  $100. 

Xo  (lays  of  grace  are  allowed,  and  interest  is  reckoned 
m  a  basis  of  300  days  to  the  year.  Interest  calculations 
are,  therefore,  simple. 

Example:  Check  rate  on  Paris  is  5.183,  discount 
rate  3 /,  find  the  60-day  sight  quotation. 

Check  rate 518.75 

Interest  60  days  @Q^ 2.60 

Stamps 26 


521.61 
The  rate  is  .5.2161  or  5.21]  —  ij. 
Hills  due  on  a  Sunday  or  holiday  are  payable  the  day 
'•<  'o'v.    Negotiated  foreign  bills  are  payable  up  to  noon 
"t  the  (lay  following  maturity. 

Checks  dra\vn  payable  in  France  should  always  be 
•lattd  in  words  in  order  to  avoid  the  stamp  tax.     This 


MICROCOPY   RESOIUTION   TEST   CHART 

'ANSI  and  ISO  TEST  CHART  No.  2) 


'■  IIS 

IIIIIM 

t±2 

m 

!r  1^ 

ir   1- 

112.0 

^    ^PLIED  IfVMGE 


^653   Eost    Mom    Slreei 


(716)   288-  5989  -  Fo, 


5.'}2 


FOKKIGN    KXCIIAN(il«: 


II 


■Hill 


m 


is  due  to  the  fact  that  tlie  law  requires  a  check  to  be 
within  eight  days  from  date  of  issue,  otherwise  it  is 
sidered  a  bill  of  excliange.  As  figures  could  be  e 
changed  the  law  requires  the  date  in  writing;. 

353.  Germ  any. —The  German  unit  is  the  mark, 
a  mint  par  value  of  .238213  cents,  generally  quote 
.238  cents;  this  quotation  is  used  for  small  transact 
but  as  a  rule  the  exchange  is  quoted  on  a  basis  of 
value  of  four  marks  or  .238  X  4  =  9.5|  cents  p 
marks,  with  quotations  advancing  by  sixteenths.  \^ 
this  method  is  used  it  is  necessary  when  making  oak 
tions  to  divide  or  multiply  by  four  in  order  to  obtain 
correct  conversion.  Thus,  1.000  marks  at  951  w( 
cost  :?-"%^"^=  $238.13. 

The  rate  is  sometimes  shaded  by  increasing  or  deer 

ing  by  sixty-fourths  of  1  per  cint.     If  the  quota 

above  had  been  95]  +  ^V  the  dollar  amount  woulc 

increased  by  ^V  of  $238.13  =  .07  cents  or  $238.20. 

To  convert  dollars  into  marks,  what  amoun 

marks  can  be  purchased  with  $1,000  @  95]  i 

at  95]  plus  ^  : 

1,000--    ?|i    =1,000 --.238125  =  4199.47  ma 
In  the  second  case  ^V  of  1  per  cent  mark  value  ra 
be  deducted;  4199.47  —  1.31  =  4198.16  marks.^ 

Stamp  duty  is  J^  of  1  per  cent  or  5  cents  on 
interest  basis  of  $95  per  4  marks.     There  are  no  d 
of  grace  and  interest  is  calculated  on  a  basis  of  30  d 
to  the  month  and  3G0  days  to  the  year.- 

'  The  same  result  w„ul,l  b,-  obtainwl  by  acUliiiR  the  fnietion  to  the  doll.ir  ^ 
before  division:  aSSliio  +  .'a  of  l'/v=-.i3Sm  +  W007i  =  .i389i.  $1,000-^.2;)1 
419n.l(>  marks. 

'^'if  ^/^J"^  M^'^  '''  o^i^'""":  the  fraetion  increases  the  price  per  mark, 
sequontly  $1,000  will  purchase  less  marks  at  the  fractional  rateT  if  thTfnic 
had  been  minus  it  would  be  added  to  the  mark  value. 

*h  I  ^' k'*"'*^?'"  ^"t '^^'^  ""^^^^  ^*  ""y  '■**^  ™"  ''«•  ^ounJ  mentally  by  multipl 
the  rate  by  .OS.  Interest  for  30  days  at  4|  =  4?  X  08  =  3.-5  crnts  4' 
.Oj  =  total  deduction  40  cents. 


CONTINENTAL    HXCHANGE 


53S 


"■'.","  '',";.'-■  ''"-''»>'  'l""t»ti"»  when  dcimnd  diecks 
arc  !lj.  and  discount  rate  in  Berlin  43  pep  cent? 

Demand  checks  If.95.i25 

l-iss  interest  fio  days  at  43 fin 

Stanii)  duties (,, 


.74 


$94,385  or  94} 
Bills  d.,e  on  a  Snnday  or  holiday  are  due  the  day 

n  ■       T"'  ""^  '''""P  ""''  '^'"^•^^^  on  Germany 
»  ..nld  bear  the  following  words  written  after  the  name 

t^'ZZ''""'  "^"^  ^''"^  ^"'^  '"-^  ^-"  our 

The  Imperial  Reiehsbank  of  Germany  has  branches 

I"  every  important  town  i„  Germany/and  transfer 

."-ney  from  one  branch  to  another  free  of  charge  for  S 

■M.  /fo/W.-Quotations  on  Holland  are  given  in 
<en  s  per  ^«W.r  or  florin  the  mint  par  value  b^eing  io 
m  ts.  The  conversion  is  simple  arithmetic.  To  convert 
d..  .,rs  ,nto  flori„e.  divide  the  dollars  by  the  ra" 
/'..'"-.  lo  convert  flonn,  into  dollarsf  multiply  the 
amount  m  fionm  by  the  rate  per  florin.  ^  ^ 

here  fractional  rates  are  granted  they  should  be 
Icalt  w,th  m  a  manner  similar  to  the  method  used  in 
.em,a„  calculafons,  and  added  or  deducted  to  the  do 
value  when  converting  g„ilders  into  dollars,  but 
e  e  dollars  are  converted  into  guilders  the  equi^le" 
I  the  fraction  converted  into  ^Mmmust  be  added  "f 
minus,  and  deducted  if  plus. 

Interest  on  Dutch  long  bills  is  based  on  .$40  per  100 

g'Mersor  florins,  and  the  bill  stamp  is  A  of  [  p^r 

-    or  2  cents  per  $40.     There  are  no  davs  of  gra« 

»"<!  interest  is  reckoned  bv  takinir  the  ev^^f  f 

"'■  ■■^..vs  and  the  year  at  300  days'^B^ilfduTr  sTnda^^ 


534 


FOREIGN   EXCHANGE 


;M  i 


Country 


Afghanistan 

Alakka 

Algeria 

Argentine  Republic. 

Achtralia 

Austbia-Hunoahv 

Belgium 

Bolivia 

Borneo 

Brazil 

British  Guiana.!  '. .  .  .  . 

Bulgaria 

Cape  Colony 

Cevlon 

Chili 

China .  . . 

colojiuia 

Congo  Free  State.  . . 

Costa  Rica 

Cuba 

Denmark 

Dominican  Republic 

Dutch  Guiana 

Ecuador ' 

Egypt ] 

England '.  . .  . . 

Faroe  Islands 

Finland 

Fiji '.'.'..'. 

France .'..'.'.. 

German  East  Africa."  ! 

German  Empire 

Great  Britain 


Greece 

Gautemala 

Hawaii 

Hayti . 

Holland  (Sfetherlands)! 

Honduras 

Iceland 

India 

Indo-China.  ....'.['..[['. 

Ireland 

Italy ' 

Jamaica 

Japan .  . 

Java [ , 

K0RE\.  .....[.'.'.'.[','.'.'. 

Liberia 

Manchuria 

Martinique 

Mexico 

Natal 


Monetary  I'nit 


TAB 

SBOWINQ   APPRC 

DOLLAR; 


Rupee  (10  Annas).. 

Dollar  a(X)Cont.H).. 

Francs  (KX)  Centimes)..  . 

IVso  (KH)  Centavo.s) 

Pound  StcrlinR  (see  Gt.  Britain) 

Krone  (I(K)  Heller)... 

t-rane  (l(X)Centime.s). 

Boliviano  ( 10<)  Centavos) 

PounU  SterlinR  (see  Gt.  Britai   ' 

MilreiM  (1,000  Reis)... 

Pound  Storlinn  (see  Gt.  Britain) 

Lew  (lOOStotiuki).... 

Pound  Sterling  (see  Gt.  Britain) 

Rupee  (100  Cents) 

Peso  (100  Centavos)    . 

Dollar  (100  Cents)  (.see  .Note) . ' '  „, 

Peso  (100  Centavos) 2^-, 

Franc  (100  Centimes)  .  "^ 

Colon  (100  Centimes)  

Peso  (100  Centavos). ... 

Krone  (100  Ore) 

Dollar  (100  Cents). ...    

Guilder  (100  Cents) 

Sucre  (1(X)  Centavos). .  

Pound  (100  Piastres  or  1.666  iiiiliemes); 
Pound  Sterling  (see  Gt.  Britain) 

Krone  (100  Ore)..  

Finmark  (lOO  Pennia). ..'.'.'.[ 

Pound  Sterlinn  (see  Gt.  Britain) 
Franc  (100  Centimes)., 

Rupee  (100  Heller).. . .      ' ' " 

Mark  (1(K)  Pfennige) . .    

^°o.5J^i?*'"''u'"''  (2"  shillings  or  240  Pence 

OW)  Farthings) 

Drachma  (100  Lepta) . 

Peso  (8  Reales  or  100  Centavos) 

Dollar  (100  Cents) 

Gold  Goude  (5  Francs  or  luio  Centimes)'. '. 
Guilder  or  Florin  (100  Cents) 

Peso  (100  Centavos)...  

Krone  (100  Ore) 

Rupee  (16  Annas) 

Piastre  (100  Cents) 

Pound  Sterling  (see  Gt.  Britain)'. '.'. 

Lira  (100  Centesimi) ,        ,„  -. 

vrd^nj^'nT  '"^ ""'  ^"''"°^'  ■  ■  ■  •  •  •  ■■■\*  S-« 

Florin  (100  Cents') 

Won  (lOOChon) 

Dollar  (100  Cents).. 

Yen  (100  Sen) 

Franc  (100  Centimes)    . 

Peso  (100  Centavos) 

Pound  Sterling  (.see  Gt.  Britain)' 


19.3 

46.5 

92.6 

26.8 

00.0 

40.0 

48.7 

94.3 

86.6 

26.8 

19.3 

86.fi 

19.3 

32.4 

23.8 

86.6 
19.3 
38.3 
00.0 
96.5 
40.2 
38.3 
26.8 
32.4 
41.4 
80.6 
19.3 


C 
1 
1 
2 
4 

1 
3 
1 
4 
1 
2 
0 
0 
1 


49.8 
40.2 
49.8 

1  00.0 
49.8 
19.3 
49.8 

4  86.6 


1     0 

1 
1 

I     0 

1 
4 
4 
1 
1 
1 
1 
1 
1     0 

I  0 
2 
1 
2 
4 
2 

2 
0 


CONTINENTAL    EXCHANGE 


535 


TABLE  OF 

TOO 

APPBOXIUATI 

DOLLARS  AND 

— === 

Approximate 

Equivalents 

>llar 

'      Sterling 

Cts. 

£    8.     d 

i2A 

1    4 

UO.O 
19.3 
96.5 

4  m 

■SB. 6 

I     0    0 

lO.i 

10 

9.3 

95; 

(8.9 

iii.O 

i4.U 
6.6 

.    ^n^'^ 

9.3 
0.6 

1    0   l^ 

2.4 

I     4 

6.5 

1    6H 

0.0 

2  ni 

6.6 

4    0 

9.3 

9« 

6.5 

I  io« 

<!.6 

3  10 

15.8 

1    iH 

J.O 

*    Ui 

J.O 

1    $ 

i.7 

2    04 

1.3 

1     0    3H 

J. 6 

1     0    0 

).8 

1     Hi 

•  -3 

9H 

.« 

I     0    0 

.3 

m 

.4 

1    4 

.8 

1    0 

.6 

I     0    0 

.3 

9« 

.3 

1    Ti 

.0 

4     IH 

.5 

4    0 

-2 

1  m 

.3 

1    7H 

.8 

1    IH 

-4 

I     4 

.4 

1     8« 

.6 

1     0    0 

3 

9H 

U 

1    0    0 

8 

2    1 

2 

1   SH 

8 

2    1 

0 

4     1^ 

8 

2    1 

3 

!<« 

8 

2    1 

6 

1     0    0 

FOREIGN  MONEYS 

tQlIVALENTS   IN 

STKKLING 


COCNTRT 


NEWFOrNDLAND.  .  . 

Nkw  Zealand.  . . . 

NiCARAUUA 

Norway 

Panama 

Persia 

Peru 


MoNETABT  Unit 


Approximate 

EqCrVALENTB 


Philippineb  (The) 

Porto  Rico 

portuoal 

roimania 

Russia 

Salvador 

Si'OTLAND 

Sehvia 

SlAM 

Soi  Tu  Africa  (British). 

Spain- 

Straits  Settlements.  . . 

SrMATRA 

Sweden 

Switzerland 

TfMS 

Turkey 

I'KiurAY 

Venezuela.    

Wales '.'. 


West  Indies — 

.^nti(?ua 

Hahanias 

liarbados 

Bermuda .... 

DoiniDica 

Grenada 

St.  KitU 

St.  I.ucia 

St.  Viuoent. . . 
Turk's  Island. 

Tobago 

Trinidad 


Dollar  (100  Cents) 

Pound  Sterling  tsee  Gt.  Britain) .'.'.'.'.'.'.'.['. 

Peso  (100  Ccntavos)    

Krone  (lOO  Ore) 

Balboa  (2  Pesos  or  100  Cents). 

Kran  (20  Shahis) 

Libra  (10  Soles,  100  Dineros,  or  1,666  Cen 

tavos) 

Peso  (100  Ccntavos) '.'. 

-Milrcis  (1,000  Reis) 

Milreis  (1,000  Reis) 

Lew  (100  Bani) 

Rouble  (KM)  Kopecks) 

Peso  (100  Ccntavos) 

Pound  Sterling  (see  Gt.  Britain) . .        .'.'." 
Dinar  (100  Paras) 

Tirai ' :.:::.:::;::: 

Pound  Sterling  (see  Gt.  Britain) . 

Peseta  (100  Centesimos) 

Dollar  (100  Cents) 

Florin  (100  Cents) 

Krona  (100  Ore) 

Franc  (100  Centimes) 

Franc  (100  Centimes) ' . 

Piastre  (40  Paras) 

Peso  (100  Centesimos) 

Peso  (5  Bolivares  or  100  Ccntavos).    . . 
Pound  Sterling  (see  Gt.  Britain) 


Pound  Sterling  (see  Gt.  Britain) . 


Dollars 


Sterling 


S    Cts. 

1  00.0  i 

4  86.6 
38 -.2  } 
20  .)j 

1  00.0 
07.5 


86.6 
60.0 
08.0 
08.0 
19.3 
51.5 
38.3 
86. 6 
19.3 
37-0 
86.6 
19.3 
56 


40 
26 
19 
19 
4 
03.4 
96.5 
86.6 


4  86.6 


1     0    0 


NoTE.s:  The  values  given  above  are  approximate  only  and  are  based  on  the  value  of  the 
bullion  contained  in  the  coin.  In  the  case  of  countries  in  Asia  or  South  America,  where  a  silver 
unit  exists,  the  exchange  value  of  coins  is  subject  to  large  fluctuations.  In  South  American 
countries  large  quantities  of  paper  money  (generally  worth  much  less  than  the  face  value) 
are  in  circulation. 

While  the  monetarj-  unit  of  China  is  the  silver  dollar,  the  coin  most  frequently  used  is  the 
silver  tael,  the  value  of  which  varies  according  to  locality  of  issue  from  61  to  69  cents. 


536 


FOREIGN    EXCHANGE 


"r  Jiolidays  are  paid  the  clay  after     Th.Vf     i       , 

est  can  he  calculated  mentaJIv  h    /  .  f  *^^^' 

thus,  mentally  by  taking  ^  of  th 

30  days'  interest  (a)4i^  V  X  .'  -  i  ^^ 

H    A  go   -  .137  or  with 

The  co„„,„„  „„,  ,  ,^Z7e'oT:'Z  T^^'"' 
a  mint  par  value  of  20  8  cent,     of .  ""^ 

of  a  mint  pfrtt:  %V'r"'r  ""'"  '"«'  *"«' 
few  t       ».,.„,  ,„  r«a„':SnS^  """''""' 

of  silver  the  b,ti„  *^  J"'  *°  ""^  ""ctuating  p, 

's  worth,  sav,  78.3  cents  ,  V    h     '      ^"  "^"""y  '" 
Hankow  to)71  3ce„tr  '^  '""'  ^""^  «"'»• 

J/'LrLZ  t:?,rt:j  'f  "•  ^^''^"'"y  ''"<'™  « 
tions  are  simple^  «„n  ,    T*  '^  ^™''-    The  ealeula 

.ate  Win  purchase  ^,..2  W:^™^?'^,^  ^ ;- 


CONTINENTAL  EXCHANGE  537 

As  Japan  is  a  gold  standard  country  the  fluctuations 
,n  the  vahie  of  the  yen  are  not  large.  The  mint  par 
value  of  the  f/en  ,s  49.8  cents,  and  quotations  are  quoted 
in  cents  |)er  yen. 

liryl.  Sundry  crchangCft.—The  following  table  gives 
the  approximate  mint  par  value  of  the  units  of  the  vari"- 
ous  e(,untries  in  cents.  Conversion  in  every  case  is  sim- 
pie.  To  convert  dollars  into  foreign  currency,  divide 
amount  m  dollars  by  rate  in  cents  per  foreign  unit, 
lo  convert  foreign  currency  into  dollars,  multiply  for- 
eign currency  by  rate  in  cents  per  foreign  unit. 


CHAPTER   IX 

FOREIGN    REMITTANCES 

338.  Non- commercial  exchange.  ~  Although 
greater  portion  of  foreign  exchange  originates  in  ( 
mercial  transactions,  tliere  is  a  constantly  increasing 
ume  of  exchange  husiness  created  by  travelers  and 
migration.  A  steady  stream  of  travelers  and  ot 
leave  the  United  States  and  Canada  each  year  to 
Great  Britain,  Europe  and  other  parts  of  the  \v( 
carrying  with  them  the  necessary  funds  for  their 
penses  in  various  forms,  such  as  circular  letters  of  en 
travelers'  checks,  drafts  and  gold. 

The  remittances  of  immigrants  to  their  relatives 
friends  in  their  home  lands  amount  to  a  surprisir 
large  figure  in  the  course  of  a  year.  These  remittal 
are  generally  made  by  means  of  drafts,  foreign  mc 
orders,  or  by  what  are  called  mail  remittances. 

For  many  years  these  two  classes  of  foreign  busii 
M-ere  in  the  hands  of  foreign  bankers  who  made  a  i 
cialty  of  the  business  of  supplying  banks,  both  in 
United  States  and  Canada,  with  the  necessary  fo 
and  foreign  machinery  for  issuing  circular  letters 
credit  and  selhng  travelers'  checks.  Gradually 
larger  banks  both  in  the  United  States  and  Canada 
the  increasing  pressure  of  their  clients'  requirementj 
this  connection,  and  found  it  advisable  to  establish  tl 
own  systems  of  travelers'  checks,  etc.     Practically  ev 

538 


FOREIGN   REMITTANCES  539 

hank  in  Canada  has  now  direct  correspondents  in  the 
pi iiitipal  cities  of  the  world  with  whom  they  have  made 
iht'  necessary  arrangements  for  the  payment  of  circu- 
lar Utters,  travelers'  checks  and  the  hke. 

A  comparison  of  the  different  methods  of  remittance 
and  a  descriptioji  of  tlie  manner  in  wliich  they  are  oper- 
ated is  interesting. 

.'}.)».  Principles  underlying  the  issuance  of  drafts.— 
A  demand  draft  or  check  is  an  un??onditionaI  order 
issued  by  one  bank  on  another  bank  or  banking  firm 
asking  the  bank  to  whom  it  is  addressed  to  pay  a  certain 
Slim  of  money  to  a  specified  person  or  institution.  ( See 
Figure  87.) 

In  the  case  of  a  bank  keeping  an  account  in  another 
country  wliere  the  exchange  value  of  the  currency  is 
steady  and  for  which  rate  quotations  are  easily  obtain- 
al)le,  drafts  are  usually  drawn  in  the  currency  of  that 
country  and,  after  payment,  are  charged  to  the  account 
which  the  issuing  bank  keeps  with  its  correspondent  at 
the  face  amount.  If  the  arrangement  calls  for  payment 
of  the  drafts  at  par,  the  correspondent's  commission  (if 
any)  is  added  to  the  face  amount  of  the  draft  when 
charged  to  the  account.  Drafts  are  often  n.ade  payable 
at  the  ()ffice  of  a  third  bank  or  banking  firm  for  account 
of  the  issuing  bank's  correspondent. 

Drafts  are  also  issued  on  correspondents  with  whom 
no  account  is  kept.  In  such  cases  cover-drafts  in  favor 
of  the  correspondents  for  the  amounts  involved  plus 
coniniission,  drawn  against  the  issuing  bank's  account 
in  one  of  the  large  settling  cities  (London,  Paris,  Ber- 
lin, New  York,  etc.)  are  forwarded  with  the  relative 
ktters  of  advice,  or  the  correspondent  is  requested  to 
forward  the  paid  draft  to  the  issuing  bank's  correspond- 
ent in  one  of  these  cities  for  redemption. 


FOREIGN  HEMriTiVNCES 


541 


^\'llt'I»  a  bank  is  requested  to  issue  drafts  on  a  coun- 
tr>'  for  uliich  it  has  made  no  draft  arranjB^ements,  a 
sttrliiig  draft  on  the  bank's  London,  England,  branch 
or  correspondent  is  usually  sold,  sterling  drafts  on  Lon- 
don king  more  easily  negotiated  than  those  drawn  in 
other  currencies,  owing  to  the  fact  that  the  great  ma- 
jority of  banks  throughout  the  world  have  correspond- 
ents or  accounts  in  that  city,  and  the  exchange  rates 
for  sterling  are  steadier  and  more  widely  quoted  than 
those  for  other  currencies. 

To  guard  against  loss  in  the  case  of  countries  in 
Africa,  Asia  or  South  America  where  silver  units  exist 
or  the  exchange  value  of  the  currency  is  subject  to  large 
fluctuations,  drafts  are  usually  drawn  in  sterling  on  the 
London  branch  or  correspondent  of  the  issuing  bank 
and  crossed  "Payable  at  the  drawees'  buying  rate  for 
si^'ht  bills  on  London,"  or  with  a  phrase  similar  in  mean- 
in^'.  The  correspondent  on  whom  such  drafts  are  drawn 
pays  them  in  local  currency  at  a  rate  of  exchange  which 
includes  his  commission  and  other  charges,  and  after- 
wards forwards  them  to  London  for  redemption  at  the 
face  amount  of  sterling. 

3(50.  Advices.— A  letter  of  advice  (Figure  88),  au- 
thenticating the  draft  and  usually  containing  the  fol- 
lowing particulars,  is  sent  to  the  branch  or  correspond- 
ent on  whom  the  draft  is  drawn: 


(a) 
(h) 
U') 
(d) 
(e) 


Xumber  of  the  draft. 

Amount  of  the  draft. 

Date  of  issue  of  draft. 

Name  of  payee. 

Name  of  bank  at  which  drafts  will  be  presented 

l)y  bearer  if  other  than  correspondent  drawn  on. 

(If  the  draft  is  to  be  readvised  to  bank  at  which 


i 


m 


No 


'^^^ BANK 

HEAD  orrifE,   TORONTO,   OXT. 


Dear  Sirs: 

This  is  to  advise  that  the  above  branch  of  this  Ban 
to-day  drawn  on 

the   undermentioned   drafts,  to  which  please  give  due  li 
reunbursuig  yourselves  in  accordance  with  our  arrangemc 


DATE 

NUMBEH 

IN   WHOSE   FAVOR 

AMOl 

(All  unused  lines  should  be 
scored  through) 

Yours  truly, 


NOTE. — This  fonn  is  to  ho 
Mscd  for  advicos  to  ForciKn 
Correspondents  only. 


MANAGER 


ACCOUNTANT 


LETTER  OF  AUVK  E  (DRAFTS) 

FlGORE  88 

54i2 


lORKIGX    KKMf'lTANCKS 


543 


it  will  be  presented,  a  note  to  this  effect  is  added  to 

the  advice.) 
(f)   Particulars  of  the  mode  of  reimbursement  (cover 

draft  enclosed,  debit  amount  to  account,  etc.). 
Should  the  draft  be  payable  by  a  third  party  (see 
above)  for  account  of  the  correspondent  on  whom  it  is 
drawn,  this  third  [)arty  is  also  advised  either  by  the  issu- 
ing' hank  direct  or  by  its  correspondent  on  receipt  of  ad- 
\ioc  from  the  issuing  bank. 

The  relative  advices  should  be  despatched  as  soon  as 
possible  after  the  sale  of  the  drafts  in  order  that  pay- 
ment may  not  be  refused  through  the  correspondent's 
l)eing  unable  (in  the  absence  of  advice ^  to  authenticate 
the  drafts. 

361 .  Specimen  forms  and  signatures. — Each  bank  fur- 
nishes the  correspondents  on  whom  it  has  arranged  to 
issue  drafts  with  specimens  of  the  special  draft  form 
and  of  the  special  advice  form  (if  any)  it  will  use, 
together  with  specimen  signatures  of  the  officers  who 
are  authorized  to  sign  drafts  and  advices  on  its  behalf. 
If  possible,  a  specimen  signature  of  the  payee  is  also 
forwarded  with  the  advice  of  a  draft,  so  that  any  pos- 
sible difficulty  in  establishing  the  bona  fides  of  the  payee 
and  draft  may  be  avoided. 

362.  Cost  of  drafts  to  purchasers.— The  amount  to  be 
charged  by  the  issuing  bank  to  the  purchaser  of  a  de- 
mand draft  is  ascertained  bv  adding  together  the  under- 
noted  amounts: 


(a) 


fb) 
(c) 

(d) 


Face  amount  of  the  draft.    (If  drawn  in  a  foreign 
curren  y  the  amount  is  converted  into  local  cur- 
rency at  the  rate  of  exchange  for  the  day.) 
Commission  of  the  issuing  bank. 
Commission  (if  any)  of  the  paying  bank. 
Cost  of  postage  on  advices. 


5U 


FOREIGN    EXCHANGE 


II 


II 

i  it 


( 


1 


303.  Drafts  versus  travelers'  checks.— Some  misi 
derstanding  regarding  th  spective  functions  of  tn 
elers'  checks  and  d  afts  has  apparently  arisen  (ev 
among  those  actively  engaged  in  banking),  and  the  f 
lowing  observations  may  therefore  here  be  made  so  1 
as  they  concern  travelers: 

In  the  Latter  case  one  draft  for  tlio  whole  sum  involved  is  u 
ally  issued  in  favor  of  the  traveler  who  cannot  obtain  the  whole 
any  part  of  the  amount  withe  ut  considerable  trouble  and 
pense  until  he  arrives  at  the  point  of  payment,  and  even  then 
must  be  identified.  After  the  draft  is  eventually  negotiated  \ 
proceeds  must  either  be  deposited  in  a  bank  or  carried  at  so 
risk  in  the  form  of  currency,  the  traveler  having  no  means 
replacing  the  amount  in  the  event  of  robbery  or  loss. 

Travelers'  checks,  however,  are  issued  in  various  denomir 
tions  as  desired,  are  negotiable  everywhere  ..  their  face  value 
banks,  steamship  companies,  department  stores  and  hotels,  t 
traveler  thus  being  equipped  at  every  stage  of  his  journey  wi 
the  means  of  making  payments,  either  l.n-irc  or  small,  up 
the  total  amount  of  the  checks  he  holds.     Further,  the  spec 
method  adopted  for  the  identification  of  the  proper  holder 
the  checks  prevents  payment  being  made  to  unauthorized  pc 
sons,  while  the  amount  of  stolen   or  lost  checks  is  refund 
on  the  execution  of  a  satisfactory  bond  of  indemnity  in  fav 
of  the  issuing  bank,  provided  the  purchaser  carried  out  tl 
instructions  on  the  checks  and  relative  letter  of  indication. 

It  will  thus  be  seen  that  drafts  are  intended  for  the  simp 
rcnittance  of  money  from  place  to  place,  whereas  traveler 
checks  furnish  the  bearer  with  a  secure  means  of  prompt! 
providing  himself  at  any  point  with  funds  to  meet  the  expcns 
incidental  to  traveling. 

In  view  of  the  undoubted  advantages  in  their  pai 
ticular  sphere  which  travelers'  checks  possess  over  draft! 
their  greater  cost,  the  wi^Iespread  nature  of  the  initis 


FOREIGN    REMITTANCES 


545 


arrangements  and  the  fact  that  the  exchange  charged  by 
correspondents  on  the  checks  is  met  by  the  issuing 
bank,  the  slightly  higher  commission  charge  which  is 
made  by  banks  for  travelers'  checks  is  fully  justified. 

364.  Travelers'  checks. — Travelers'  checks  enable  a 
traveler  to  provide  himself  with  funds  without  delay  at 
any  point  of  his  journey  in  a  convenient  yet  inexpensive 
manner.  They  are  issued  in  denominations  of  even 
amounts  ($10,  $20,  $50,  $100  and  $200:  £5,  £10,  £20, 
etc.),  with  the  exact  equivalent  in  the  moneys  of  the 
principal  foreign  countries  stated  on  the  face  of  each 
ciieck.  (See  Figure  89.)  They  may  be  cashed  practi- 
cally anywhere,  are  self-identifying  and  easily  negoti- 
ated, and  are  therefore  one  of  the  safest  and  best  forms  in 
wliich  to  carry  money  when  traveling.  They  are  issued 
by  all  first-class  banks  at  a  small  premium. 

iiOry.  Payment  of  checks. — The  issuing  bank  usually 
holds  the  paying  agents  of  their  travelers'  checks  free 
from  responsibility  in  cashing  such  checks,  provided: 

(a)  The  holder  s'gns  them  in  the  presence  of  the  pay- 
ing agent. 

(b)  The  signature  of  the  holder  and  that  of  the  coun- 
tersigning oflBcer  agree  with  the  signatures  con- 
tained in  the  relative  letter  of  indication. 

(c)  The  numbers  of  the  checks  are  entered  on  the  letter 
of  indication. 

(d)  The  checks  are  negotiated  within  the  period  speci- 
fied (usually  twelve  months  from  date  of  issue) . 

(e)  The  other  general  terms  of  the  circular  of  instruc- 
tions are  duly  complied  with.* 

366.  Payment  to  holders. — In  countries  specified  on 
the  face  of  the  check  the  face  amount  of  local  currency 

'  This  circular  of  iastructions  is  generally  printed  in  the  principal  commercial 
languages  for  the  benefit  of  paj'ing  agents. 
C— VIII— 35 


o- 
o 


THIS   cur.rK    SHOWS  rni    exact   amount  or  movet  which 

WILL  HE  PAID  IX  OOLI>  OR  ITS  EQI'IVALENT  IN  THE  COrNTHIfH 
SPEriALLV  ntsKiNATED  HEIIEON  WITIIOfT  DEDUCTION  l)R 
DISCOUNT   EXCEPT   IN   COUNTHIES    REQUIKING   A   STAMP 


n 
m 

I 
> 


3 


O    5 


3     ' 
k     O 

>  '-• 

2  H 

»  I 


o    r> 

O      3 


31 

B 

n 

■£ 

% 

a 

R 

e 

B 
B 

s 


o 


^1  |2.gi 


M 


2  ."    -.? 

3     =■?.; 


i  =  " 


2 

5 


3 


w 

o 

93 


^  9 

o  - 

y.  B 

o 


S2.-S 
?3 


o 


€ 
5 


?! 

m  3 

^.r. 

*<  ? 

I^f 

=  33 

£5  -  = 

1       3 

Trr  .' 

N=.-^ 

— 

fi-^f 

r 

^ 

B 

S     I 

3 

'JD 

w    " 

5   3 

r 

?  ri 

.— 

832 

*=?:' 

8=?! 

•ir 

^ 

1 

» 

M  "  —  I 

SiT 

a 

5fT 

1 

At 

current. 

rates 

02 


31 

n  r 

n 

n 
0 


n 


0 
50 

> 

0) 


X 


> 

M 


o  -< 


a  r-. 
.'2 

B  S 


w 

0 


> 
o 


Z 
> 

> 

z 
> 


0 

•«) 

0 

0 

z 

0   2 


o- 
o- 


546 


FOREUiN  REMITTANCES 


547 


is  i)ai<l  to  the  holder  without  deduction  except  for  reve- 
niir  stamps  (if  any).* 

J II  other  countries  the  equivalent  of  the  sterling 
iiiiioiitvt  is  paid  to  the  holder  at  a  rate  of  exchange 
wliich  iticludes  the  commission  and  other  charges  of  the 
paying  agent. 

Ill  countries  where  a  revenue  stamp  is  necessary  the 
lost  of  such  stamp  is  charged  to  the  holder  of  the  check.^ 

aOT.  Redemption  of  checks. — Paid  travelers'  checks 
arc  rt'deemed  as  follows: 

(a)  If  paid  in  North  America,  they  are  forwarded  to 
the  New  York  office  or  correspondent  of  the  issu- 
ing bank  of  redemption  at  the  face  amount  of  dol- 
lars plus  the  commission  agreed  upon.* 

(1))  If  paid  outside  North  America,  they  are  forwarded 
to  the  London,  England,  branch  or  correspondent 
of  the  issuing  bank  for  redemption  at  the  face 
amount  of  sterling  (or  its  equivalent)  at  the  cur- 
rent rate  of  exchange  plus  commission  at  the  rate 
agreed  upon.     (In  the  case  of  countries  not  speci- 

•  Mthimgh  a  fixod  amount  of  sterling  is  specified  for  Great  Britain  on  the  face 
of  travclors'  checks,  it  should  be  borne  in  mind  that  the  sterling  current  in  Aus- 
tralia, British  South  Africa,  British  West  Indies,  etc.,  is  of  a  quite  different  exchange 
valuo.  A  similar  remark  may  also  be  made  regarding  the  colonies  and  dependen- 
cies i)f  (itlitT  countries  which  use  the  same  currency  (francs,  etc.)  as  the  respective 
iiiutlicr  country.  In  such  places  all  travelers'  checks  are  paid  at  the  current  rate 
fiT  purchasing  exchange  on  the  capital  of  the  respective  mother  country. 

■  Hotels,  .steamship  companies,  departmental  stores,  etc.,  usually  accept 
tr.iM'lors'  checks  in  payment  of  customers'  cuxounis,  but  do  not  bind  themselves 
to  ( a.sh  checks  for  the  purpase  of  providing  the  holder  with  funds. 

'  As  travelers'  checks  paid  in  North  America  are  checks  on  Xcw  York,  banks 
at  points  where  New  York  exchangers  usually  at  a  premium  often  make  no  com- 
mission charge  for  cashing  the  checks. 

In  the  case  of  Canadian  bcnks  which  issue  travelers'  checks,  it  is  customary 
ti'  redeem  each  other's  checks  at  par  when  the  two  banks  concerned  are  represented 
Iwally.  In  other  cases  they  are  redeemed  through  the  Cltairing  House  or  otherwise 
liv  diiv  bruucU  of  the  issuirig  bank  which  is  convenient  for  the  purpose,  at  the  face 
ainmint  plus  the  usual  commission  on  checks  paid  and  redeemed  in  North  America 
uamcly,  ^\  of  1  per  cent,  minimum  5  cents  each. 


548 


FOREIGN    EXCHANGE 


m 


fied  on  the  face  of  the  check  the  paying  agci 
already  obtained  his  commission  from  the  cr 
sion  of  sterhng  into  local  currency  and  the  c 
are  therefore  redeemed  at  the  face  amoui 
sterling.) 

(c)  Banks  having  extensive  business  relations  with 
oils  European  countries  occasionally  appoint 
chief  corresj)ondents  in  the  respective  countr 
central  redemption  agents  for  their  tra^ 
checks.  In  such  cases  the  paid  checks  are  for\v 
to  these  correspondents  for  redemption  at  th< 
amount  of  local  currency  plus  the  comm 
agreed  upon,  and  are  debited  to  the  account 
the  issuing  banks  keep  with  these  correspondei 

(d)  Hotels,  department  stores  and  private  ba 
often  hand  travelers'  checks  paid  by  them  to  a 
bank  for  redemption,  such  third  parties  beir 
lowed  a  commission  of  (say)  ^  of  1  per 
which  is  added  by  the  local  bank  to  its  own 
mission  when  forwarding  the  check  to  a  d 
correspondent  for  redemption. 

368.  Letter  uf  indication. — Each  purchaser  of 
elers'  checks  is  furnished  with  a  letter  of  indii 
(Figure  90),  usually  bound  with  the  list  of  p 
agents,  specifying  the  numbers  of  the  travelers'  ( 
sold  to  him  and  signed  by  the  purchaser  and  the  i 
who  countersigned  the  checks.  It  is  indispensable 
security  of  the  holder  that  this  letter  of  indicati 
carried  separately  from  the  travelers'  checks. 

A  few  institutions  do  not  issue  a  letter  of  indi 
with  their  travelers'  checks.    In  these  cases  two  i 
(one  at  the  top  and  one  at  the  bottom.    See  Figui 
are  provided  on  the  check  form  for  the  signature 
holder.    The  first  s'gnature  is  made  in  the  presei 


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To  OlR   CORREKPONOENTH: 

lii'.ak'iiicn, 


whose  Dj 


-n-e^«.«uu.ure  i,  u.  be  found  Mow,  i,  the  holder  of  our  Truvele,,'  Cherk, 
No.  X 


-No.  A  . 
No.  B 
No.  C 
No.  D.. 


We  comnieud 


to  No.  X 

of  the  denomiDation  of  $10. 

to  No.  A 

of  the  dpnomination  of  $L>0. 

to  No.  B 
of  the  deiiominatioo  of  $50. 


to  No.  C 
of  the  (lenomination  of  $100. 


,     ■       .    to  No.   n 

of  the  denominatioD  of  $200. 


'"  your  u.sub1  courteaiea. 

FOR  THE 


inclua 
inrlua 
iuduKi 
inclusi 
iiK'luai 


BAI 


srov.tTUBi;  of 


{ThiK  aiunaturi  muitt  offree  tciih  ] 
couHtersiunature  un  the  checks) 


are  purchased.) 


LETTER    OP    INDICATION    AfVOMPAXYIXG  TRAVELERS'  CHF 

riauHE  90 


.191 


To  OCR   CORREHPON'DE.NTS: 

Gentlemen, 


.M 


the  bearer  of  thi.,  letter,  whose  ^i^nature  i.  to  be  found  below,  ha,  been  ,uppU« 

wuh  our  Circular  Letter  of  Credit  No ^^j  ^^  ,„„„^„j 

to  your  usual  courtesies. 


FOR  THE 


..BANS 


SlaNATUBI  O* 


LETTER  OF  INDICATION  ACCOMPANYING  LETTER  OP  CREDI 

riGCRE  S2 

650 


FOREIGN  REMITTANCES 


5.31 


RS'  CHECKS 


the  officer  who  issues  the  checks,  and  the  second  in  the 
j)re.seiice  of  the  paying  agent,  who  compares  the  two 
signutiires  to  establish  their  identity.  This  system,  how- 
ever, readily  lends  itself  to  forgery  should  the  checks 
be  lost  or  stolen,  as  the  presenter  of  the  checks  has  a  copy 
of  the  necessarj''  signature  before  him  while  signing  the 
ciiecks  or  tlie  signature  may  be  lightly  traced  in  pencil 
in  tiie  space  provided  before  presentation  and  covered 
with  ink  in  the  presence  of  the  paying  agent. 

During  1913  the  Federation  Universelle  des  Soci- 
ctcs  (V Hoteliers  (with  which  the  principal  hotels  of  the 
^v()rld  are  associated)  addressed  a  circular  letter  to  the 
various  issuers  of  travelers'  checks  stating  that  in  view 
of  the  risk  involved,  ])ayment  by  the  leading  hotels  of 
travelers'  checks  of  this  form  would  thereafter  be  more 
or  less  uncertain,  and  suggested  that  the  banks  adopt 
the  safer  method  whereby  the  specimen  signatures  of  the 
])urcliaser  and  coimtersigning  officer  are  given  in  a  sepa- 
rate letter  of  indication. 

3G9.  Lost  travelers'  checks. — The  same  care  should 
be  taken  of  travelers'  checks  as  of  money,  and  due  pre- 
cautions taken  to  avoid  risk  of  loss.  Should  this  occur, 
however,  the  holder  is  advised  to  communicate  imme- 
diately by  telegraph  with  one  of  the  redemption  agencies 
of  the  issuing  bank  or  the  branch  at  which  the  checks 
were  obtained,  so  that  the  presenter  of  such  checks  may 
be  traced  without  delay. 

The  issuing  bank  will  usually  refund  to  the  owner 
tl'.e  face  value  of  lost  or  destroyed  checks,  or  will  issue 
a  new  supply  in  their  stead,  upon  receipt  of  sufficient 
evidence  of  loss  or  destruction  thereof  and  the  execu- 
tion of  a  satisfactory  bond  of  indemnity,  provided  the 
holder  immediately  notifies  the  bank  by  telegraph  of 
the  loss  as  mentioned  above. 


552 


FOREIGN    EXCHANGE 


:    •■ 


1  ravelers'  checks  are  useful  for  those  carryinir 
paratively  small  sums  of  monev,  as  they  can  be  m 
ated  at  hotels,  department  stores,  etc..  where  it  i 
possible  to  secure  funds  under  letters  of  credit 
th.)se  who  require  to  provide  themselves  with  larce  s 
say.  $1,000  or  over,  will  find  a  lett  r  of  credit 
convenient.  A  gcK,d  plan  for  many  travelers  is  to  < 
both. 

370.  Letters  of  credit.~The  principal  banks  ol 
world  issue  letters  of  credit  designed  specially  fo, 
use  of  travelers.  They  are  accompanied  by  a  [ 
of  indication  (see  Figure  92),  and  are  of  two  ki 
namely: 

(a)  Domestic,  drawn  in  local  currency  for  use  in 
country  where  they  are  issued    (Figures  94 
94A),  and, 

(b)  Foreign,  usually  drawn  in  sterling   (Figures 

The  holder  of  one  of  these  credits  may  draw  any  « 
he  desires,  up  to  the  amount  of  the  credit,  through  i 
respondents  at  all  the  principal  i)laces  visited  by  b 
ness  men  and  tourists  throughout  the  world,    'a 
of  paying  agents  is  supplied  to  each  purchaser. 

371.  Payment  to  the  holder.— The  holder  draw 
draft  on  the  central  correspondent  of  the  issuing  h 
designated  in  the  letter  of  credit  for  the  amount 
money  he  requires  and  i)resents  it  to  one  of  the  pay 
agents  designated  in  the  list  of  paying  agents.  '^ 
paying  agent  then  compares  the  signature  on  the  dr 
with  that  given  in  the  relative  letter  of  indication  a 
authenticates  the  signature  of  the  officers  appearing 
the  letter  of  credit  by  means  of  the  specimens  he  I 
on  file.    If  the  signatures  are  in  order  he  makes  pj 


So 


Circular  Letter  o*'  Credit 


ISSUED  BY 


Stg. 


THE BANK. 


19 


To  the  Bankers 
named  in  our  Letter  of  Indication. 


This  letter  will  be  presented  to  you  by 

in  whose  favor  we  have  opened  a  credit  of 

.* Sterling 


to  be  availed  of  by demand  drafts  on 

The Bank,  London. 

iihich  we  request  that  you  mil  negotiate  at  the  current  rate  of  the 
day,  less  your  usual  charges. 

The  drafts  should  bear  the  following  clause: —    "Drawn 

under    Credit    No ";    they    should   be   drawn 

trithin  one  year  from  the  date  hereof,  and  the  date  and  amount 
of  each  draft  cashed  are  to  be  entered  in  the  space  provided  on 
the  back  of  this  letter. 

M 

provided  with  a  copy  of  our  Letter  of  Indication,  whereon  

signature  may  be  found. 


For  The Bank. 


CIRCULAR  (STERLING)  LETTER  OF  CREDIT 
Figure  93 


553 


SFKCrFICATION 
OF  Payments  Madk  Under  thih  Letteh  ok  Credit 


Date 

When 

Paid 


Paid  by 


Amount  in  Words 


Araoi 

in 

Figu 


CIRCULAR  (STERLING  LETTER  OF  CREDIT  (Back) 
Figure  93a 


554 


Cjhcli^k  Lkttku  ok  Creuit 

Vo         IHHUKD   BY  $ 

THE «AXK. 


191 


To  the  Agenh  and  Correspondents 

of  The        Bank. 


This  letter  will  be  presented  to  you  by 


M 


'in  whose  furor  we  hare  opened  a  credit  of 

Dollars 

lo  be  availed  of  by demand  drafts  on  The  Agents 

The Bank,  Sew  York, 

which  we  request  that  you  will  negotiate  at  the  current  rate  of 
the  day  less  your  usual  charges. 

The  drafts   should   bear   the  followiny     lause:     "Drawn 

under    Credit    So ":    they    should    be    drawn 

within  one  year  from  the  date  hereof;  and  the  date  and  amount  of 
each  draft  cashed  are  to  be  entered  in  the  space  provided  on  the  bark 
of  this  letter. 

We  beg  to  refer  you  to  our  separate  letter  of  introduction 
for  a  specimen  of  M signature. 

For  The Bank, 


CIRCULAR  (DOLLAR)  LETTER  OF  CREDIT  (Front) 

FiGUBE  94 

555 


Ill 


SI*K(  IFU'ATION 
or  Payments  Madk  Lnukk  th.«  Lkttek  ok  Ck»: 


Dute 


CIRCULAR  (DOLLAR)  LETTER  OP  CREDIT  (Back; 
Figure  94a 
556 


re  )Ili:  I  Ci  N   HEM  ITT  ANCES 


5A7 


iiurit  and  critrrs  tlic  particulars  of  the  draft  on  the  back 
„t'tlii'Ulli'«*<>f  iTcdit. 

Ill  lurordaiu'e  with  tlie  usual  banking  custom  the  pay- 
iiijr  iiMitit  deducts  his  commission  at  the  time  payment 
is  iiiiido  to  the  holder  of  the  letter  of  credit,  but  should 
111!'  I(  tfir  of  credit  request  him  to  make  payments  with- 
iHit  (Inluction,  his  cominission  is  added  to  the  amount 
of  till-  dralt  when  forwarding  it  for  redemption  to  the 
hraiich  or  correspondent  of  the  issuing  bank  named 
ill  llie  letter  of  credit.  If  the  letter  of  credit  is  not 
(liaun  in  local  currency  the  paying  agent  makes  pay- 
imiit  at  a  rate  of  exchange  which  includes  his  commis- 
sion. 

The  hanker  who  pays  the  draft  exhausting  the  letter 
dl'  credit  forwards  it  to  the  central  agent  together  with 
tlic  (haft  for  redemption. 

Adv!"  1  or  restricted  letters  of  credit  are  similar  in 
tonii  to  ircular  letters  of  credit,  except  that  they  are 
a(l\  isod  direct  to  the  correspondents  to  whom  they  will 
1)0  presented  for  payment,  and  specimen  signatures  of 
the  holder  are  forwarded  to  these  correspondents,  so 
tliat  a  letter  of  indication  is  unnecessary. 

Letters  of  credit  are  available  for  the  period  speci- 
fied thereon  only  (generally  twelve  months  or  less),  and 
paying  agents  should  always  take  care  to  see  that  this 
period  has  not  expired  when  a  letter  of  credit  is  pre- 
sented to  them  for  negotiation. 

ii7'2.  Circular  notes. — Circular  not^s  (usually  written 
in  French)  are  similar  in  form,  payment  and  redemp- 
tion to  travelers'  checks.  They  are  issued  for  fixed  even 
amounts  of  a  given  currency  (generally  sterling  £lO, 
£20,  etc.),  and  are  payable  at  that  amount  without 
deduction  in  countries  which  use  that  currency.  In 
eountries  Mhere  th(    local  currency  differs   from  that 


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FOREIGN  REMITTANCES 


561 


designated  on  the  circular  notes,  the  equivalent  of  the 
amount  is  paid  at  the  current  rate  of  exchange.  The 
amounts  of  local  currencies  to  be  paid  to  the  holder  are 
not  specified  on  the  face  of  the  note,  and  this  consti- 
tutes the  ciiief  difference  between  circular  notes  and 
travelers'  checks  (see  Figures  95 A  and  DoB). 

S7:i.  Foreign  money  orders.— There  k  no  cheaper, 
safer  or  more  convenient  means  of  remitting  small  sums 
of  money  to  any  part  of  the  world  than  that  of  foreign 
money  orders  { Figure  96) .  They  are  usually  drawn  in 
sterling,  the  maximum  amount  of  any  one  order  being 
limited  to  (say)  £25.  For  amounts  in  excess  of  this  sum 
it  is  cheaper  and  more  convenient  to  purchase  a  draft. 

374.  Payment  of  orders. — Foreign  money  orders  are 
not  usually  advised  to  the  paying  agents,  but  the  issuing 
bank,  as  a  rule,  holds  the  paying  agents  of  their  foreign 
money  orders  free  from  responsibility  in  cashing  them, 
provided : 

(a)  The  money  orders  are  drawn  on  the  proper  form. 

(b)  The  amount  of  any  one  money  order  does  not  ex- 
ceed the  limit  fixed  by  the  issuing  bank. 

(c)  The  signatures  of  the  officers  on  the  money  order 
agree  with  the  specimen  signatures  of  authorized 
signing  officers  on  file. 

(d)  The  money  order  is  presented  for  payment  within 
(say)  12  months  of  the  date  of  issue.  (After  the 
expiration  of  this  period  the  money  r-rders  are  pay- 
able only  at  the  head  oflice  of  the  issuing  bank.) ' 

Patmevt  to  Holders: 

(a)  In  Great  Britain  and  Ireland  the  face  amount  of 
sterling  is  paid  to  the  holder  without  deduction  ex- 
cept for  revenue  stamps. 

'  Spedmen  forms  and  signatures  are.  of  courM-,  supplied  to  the  paying  agents 
when  the  arrangement  for  the  encashment  of  foreign  money  orders  is  made. 
(— VIIl— 36 


n  ji  ii  I- 

jty    *-B    J*    t- 


FOREIGN  REMITTANCES 


(b) 


563 

(b)   In  countries  otiier  than  rs.«af  u    *  • 

the  equivalent  of  I       T  .       ^'*'*^'"  ^"^  ^^-eland 

resign  ro;4x-'^'''°'''^''°"^^'''"'^ 

Hkdkmptiox: 

'i^r™"'  "'  ^'"""""  -'"^  '"^  co^^sbn  ated 

Foreign  money  orders  paid  in  countries  other  than 
f.reat  Britain  and  Ireland  are  redeemed  hV*?, 
London  Kngland,  braneh  or  cor  espTdent  /f   h! 
-«u,ng  bank  at  the  face  amount  of  sterhng! 

;™es.  -ts ,,,,  •  j^rrtintttirrnt"; 

pn>  a  cer  a.n  sum  to  a  specified  person  in  that  raun 

-n„,i::ion(c  ";;;::„,' r  «'^  ^-p-ndenfs 

TUr.  V  "sualjy  the  same  as  for  drafts  ^ 

'""""I  sterling)  i,  established  so  ^h«tfU  ].'  """"'"  *"'^<''  ^f*--  '«  th" 

'I-  nt  intervals  „,.,  be  „Sed  "'"""  "'  '"™'^'''"«  """*»»'«-  "^  fre- 


No 

Date 

Received  from 


101. 


So. 


THE  CANADIi^ 


(Rcgidcncc) 
For  remittance  to 


u 


Received  from 


(Bank) 


For  payment  to 


(Name  of  Payer) 


(Town) 


(Province) 
(Country) 


Foreign  Currency. . 


Trannlation  of  paragraph  in  foreign 
languages  appearing  on  "Xotine  for 
Payee." 

"If  the  above  amount  is  not  received 
within  10  days,  send  this  slip  with  your 
exact  address  to  the 


(Correspondent  in  foreign  country) 


Special  Xote— It  is  important  that 
the  name  of  the  foreign  correspondent 
be  inserted  on  the  "Notice  for  Payee" 
in  the  space  following  the  instructions 
in  the  relative  foreign  languagt. 


gfor 

a 

^tobc  remitted  to  . 

Sfori 


(Air 


'  payment  to 


(Christian  N 


(Street  and  Town 

TH 


O  • 

u 

'^    0^    ■*fi 

^  <  ^ 
U 


;   a 
^   a 

3 
O 

a 

4 

4) 

jS 


-d 


I 


•a 

1- 

OS 


2'" 
"S3 

•I* 
H 

.2  a 


§ 

o 

I 

'i 


I 


§• 


> 

u 

1 1 

y 


5  a 

< 

ea  a 

N 


•5 


c: 


gs 


e 


a' 


V. 

QJ 


It  is  important  that  the  name  of 
space  following  the  instructions  in 


564 


RECEIPT  F( 


(R*Wi|H 

ADIAN  B 

(Name  of 

(Amount  in 

(Foreiu 

"  (Nam, 

'hriatian  Name) 

and  Town) 

THE  a 


•9  S 


K 

a 

>•  b 

It 


i-3 

Li 


name  of  the 
ctions  in  the 

Fig 

;eipt  for 


"  'i 

X  3 


for  HiiuitlorJ 

ANK  OF  COMMERCE 

BRANCH 

^  1»1 


5  Hiiuitter) 


H  (urreucy) 
X  curiiuij ) 


of  ituiik) 


Dollun 


(Suruame) 


0 

^ 

(Province  and  Country) 

NADIAX  BANK  OF  COMMERCi: 

AfC'ountant. 


u  - 


3 


e  tt 
.S  ^ 

u 

o  s 


-.■i_     t  —  o    tea 

-  -  --    c  .,      s  ~ 


:    V.  ■■ 


c  -S     ~'  ""  X 


I 

e 


e 


-ir 


i^  -^5 


C    r 

5,  .- 


J2  2 


5  f    1*     :  -J 


•<  si  ="    .       < 

Si.:      o  =- 

K    N    ?      ■  >^    t 


(Lett«T  of  Advice  for  Correspondent) 

No 

The  Canadian  Bank  or  Coumercb 

Branch 


191 


(jentlemen 


Please  pay  to 

(N'anif  of  I'uyeej 

Clown) 

(I'rovince) 


the  sum  uf 


(Foreign  Currency) 

from 

(Name  of  Keiiiitit'i ) 

C Town)      (Address  of  Heniittirj       (Provinir ) 

A  iDver  draft  for 

in  favor  of  yourselves  is  enclosed  here- 
with. 


f'Tc  ii-n  correspondent  be  inserted  in  the 
r(l;illv^>  foreij,'n  langiiugc. 

IKK   97 

MAIL  REMITTANCE 

665 


...  Manager 
Accountant 


3UU 


!S 


FOHEIG.V    EXCHANGE 


with  two  I  ips  , ':  srr  '!'"'""•■'''  ^y  »- 

ficiary.  which  uSuJjtT'^'""  '""'' 
".unicate  with  the  mutr  '*■■"  ""f '^«<'i".v)  to 
tinned  thereon  I  n  '        '"'''■"?''"''""  if  the  sum 

uttv!,.     (j,ee  figure  97.) 


'■  reaches  its 
^y  Ju's  bank 
he  has  paid 
thereof  in 
to  the  bene- 
y)  to  com- 
e  sum  men- 
ourse  of  a 


APPENDIX 

ENDORSEMENTS   AS   ADOPTED   BY  THE 
CANADIAN    BANKERS'  ASSOCIATION 


ENDORSEMENTS 

Conventions  axd  rules  of  the  Canadian  bankers'  associa- 
tion KESPECTING  ENDOHSKMENTS,  ADOPTED  BY  THE  COUN- 
CII,  OK  THE  CANADIAN  BANKERS'  ASSOCIATION  ON  THE  «0TH 
KEBRIAKY,  1908,  UNDER  AUTHORITY  OF  A  RESOLUTION 
I'ASSED  AT  THE  ANNUAL  MEETING  OF  THE  ASSOCIATION,  6TH 
OCTOBER,    1897. 

1.  Mode  ok  Endorsement.  An  endorsement  may  be  either 
written  or  stamped,  in  whole  or  in  part. 

'i.  Regular  Endorsements.  A  regular  endorsement  within 
tlic  meaning  of  the^e  Conventions  and  Rules  must  be  neither  re- 
strictive nor  conditional,  and  must  be  so  placed  and  worded  as 
to  show  clearly  that  an  endorsement  is  intended. 

If  purporting  to  be  the  endorsement  of  the  person  or  firm  to 
whom  the  item  is  payable  (whether  originally  or  by  endorse- 
imrit),  the  names  must  correspond,  subject,  however,  to  Sec- 
tion 32,  sub-sec.  2,  of  the  Bills  of  Exchange  Act,  which  is  as 
follows : 

"Where,  in  a  bill  payable  to  order,  the  payee  or  en- 
"dorsee  is  wrongly  designated,  or  his  name  is  misspelt,  he 
"may  endorse  the  bill  as  therein  described,  adding  his 
"proper  signature ;  or  he  may  endorse  by  his  own  proper 
"signature." 

567 


MRl 


1 
i  : 


508 

APPEXDIX 

been  „„,|,„nVd  ,„  .,„„  '^,;  ""     '«'  '      "'■"^  "'«"'' 

Bro™  Company   l°2,',      ;    '"  '  ■•">  '"■■  PP)  Tl,e 
a  mtrictivc  c„,lor,c,„i.„t  .1,;^  •  '"•'"■■™'"™<.  othe, 

'orcgo-v  .i.fi.u„„„ : ;  :';„;':'; '"  "'•™''''''"^'  "■' 

placed  or  .or.ld  „,  ."':'«'' "^"''"'""'".t.  or  .|„VI, 

restnctMc  en<Iorscrncnt  as  follows 
"An    ciiflorsonient    is    rcstriVf.-m      i-  i 
further  ,.«„„•„„•„„  „,  ^hJmTl,^'''    "'""'''"' 
a  mere  a„,h„r,,y  ,„  ,„„,  .,,'  ^      '  XT  '.'" 
and  not  a  transfpr  nf  tu  ,  thereby  direc 

'^--nt„fx,„r>,oor:dfr;:rt„:j::L'' 

«■"!  Rui.s,  .i„,„,„      "Z\^\  "'"""'"«  -f  "-«"  fonventi, 

»i-i..  .he  ,„o„,o„  L:;:t  :o!,:r,™;;  *°  "■''-  '-^  '■"»-'• 

Z"""  f  P0»"  only  ,0  oro,lit  „f . . 

r  or  deposit  in  i      , 

"Deposited  in ...  : j,.'  ?",''  *°  ^''^^'t  °^ 

"Credit  ;  account  of 

hank."  •  •  •  . 

5.  Form  and  Effect  of  GrAR.xTEF      A 
dorsements  shall  be  in  the  followino-  f  «^"'^'-«"tee  of  e, 

"Pn-or  endorsements  .u^rd  t^"  "^r'^"  '"l  ^ 

"'  "y-  •  .    (name  of  bank). 


APPENDIX 


509 


It  nwiy  be  written  or  .tampecl,  but  Hhall  be  signed  in  writing 
l»y  Hii  authorized  officer  of  the  bank  giving  it. 

By  virtue  of  such  guarantee  and  of  these  Conventions  and 
Rules  the  bank  giving  same  shall  return  to  the  paying  bank 
the  amount  of  the  item  bearing  the  guarantee,  if,  owing  to  the 
nature  of  any  endorsement,  or  to  its  being  forge<l  or  unau- 
thorized, it  should  appear  that  such  payment  was  improperly 
made. 

a.  Km,orskmkxt  by  Dkpositixg  Bank.  When  one  bank 
•lepoMts  >v,th  or  presents  for  payment  to  another  bank  (whether 
through  the  Clearing  House  or  otherwise)  a  bill,  note  or 
(heck,  the  item  so  deposited  or  presented  shall  bear  the 
stmnped  open  endorsement  of  the  depositing  or  presenting 
bank.  Such  stamp  shall  contain  the  name  of  the  bank  its 
branch  or  agency,  and  the  date,  and  shall  for  all  purposes  be 
the  en.lorsement  of  the  depositing  or  presenting  bank;  and, 
except  as  heremafter  specified,  no  further  or  other  endorse- 
ment shall  be  required,  whether  the  item  be  specially  payable 
to  the  bank  or  otherwise,  or  be  payable  at  the  chief  office  or 
elsewhere. 

7.  Restrictivelv  Endorsed  Items.  If  a  bill,  note  or 
check  bearing  a  restrictive  endorsement  be  so  deposited  or  pre- 
sented, the  depositing  or  presenting  bank  shall,  ip,o  facto,  and 
by  virtue  of  these  Conventions  and  Rules,  be  deemed  to  have 
j,'..aranteed  such  endorsement  in  accordance  with  Section  5 
boreof,  and  shall  be  liable  to  the  paying  bank  to  the  same  ex- 
tent as  ,f  such  guarantee  had  been  actually  placed  upon  the 
.tern,  but  payment  may,  notwithstanding,  be  refused  until  the 
rejit fiction  be  removed. 

8.  lRREGri.ARi.Y  ENDORSED  Items.  If  a  bill,  note  or  check 
beanng  an  irregular  endorsement  as  above  defined  be  so  de- 
posited or  presented  the  depositing  or  presenting  bank  shall 
endorse  thereon  the  guarantee  referred  to  in  Section  5  hereof 
but  payment  may,  notwithstanding,  be  refused  until  the  irreir- 
ularity  be  removed. 

9.  Letters  of  Credit.  Deposit  Receipts,  etc.     When  a 
ettcr  of  credit,  deposit  recei^it,  or  other  hew   lot  negotiable, 


570 


APPFA'DIX 


and  to  ulHd. ,  .0  provision,  of  the  Billn  of  Kx..,.„„«e  Ac, 

n  the  fol  ow„.^  fonn.  or  to  the  like  effect,  j.all  be  wr 
.unped  thereon.  .i«ned  in  .ritin^  b,  a'n  «uth  i.ed 
•f  the  presenting  or  depositing  bank.  viz. : 

u,         ,"      ■'■"'•'    '"''^"'"'fi"'   «ff«.n.t  all  claim, 
under  by  an\-  person." 

2«  b."..  no  „bjco.,„„  .„,  ^.  „„.,|,.  ,„  „  f        P 

prm,d«l  for  be  g.vc,  yet  ,„  vie.  of  .l,e  ro,po,„ibilitT 
a  .epo,,  „,g        p„,^„,,„^  ^^__^|^  ,^  eonnee   „„ 

,::•:;;"' ""'  ■""'"'"'"  * ■"- ■•"  -»"« o ei, 

Jla^e  all  endorsements  on  itonw  ,J,.nn«;*„  i 

objeetion.  ^  ^'""'  '•^^'^'^""^  *°  ^'  --"^ned  wiU 

11.  Amexdmext  Adopted  20th  Febhiary   IQOfl      T 

=;r;t;.r,r:?-;i';i-r  £~ 


»gc  Art  ilo  not 

»nd  indcin.nfv 

l>c  written  or 

liortzed  .»fflc»r 

named  bank 
claim*  here- 

is  understood 
f  or  present- 
tive  endorse- 
rantee  above 
ibilitjr  which 
i?ction  there- 
tie  efforts  to 
H'nted  by  it 
public  gen- 
»nd  uniform 

'  made  with- 
liall  not  b 
ed  with  the 

0.  In  case 
Jrwlse,  sent 
House,  the 
ns  guaran- 
on,  and  i/ 
nplied. 


gl'ESTIONS  0\  RULES  AND  REGULVTIONS 
FOR  BANK  ROUTINE 


No 


QUK8TIO.N 


ANSWER 


SECTION  1.    General 

Is  every  officer  provided  with  a  copy  of  the 
Rules  and  Regulations? 
Is  the  work  of  each  day  always  finished  on 
I hut  day? 

Does  every  member  of  the  staft  report  for 
<luty  punctually  at  9  A.M.? 
Are  errors  in  the  Bank's  hooks  or  docu- 
ments ever  corrected  hy  erasure? 
Are  salaries  for  the  current  half  month  ever 
paid  before  the  8th  or  23rd? 
Has  any  officer  receiving  a  salary  of  less 
than  $1,000.00  (exclusive  of  allowance)  a 
Current  Account  with  the  Bank? 
Are  any  loans  to  any  officer  of  this  Bank 
or  any  other  Bank  carried  at  this  Branch? 
Has  any  officer  of  another  Bank  a  Current 
Account  at  this  branch? 
Have  furloughs  been  taken  in  accordance 
with  the  rule? 

SECTION  II 
Manager  and  Accountant 

Does  the  Manager,  either  individually  or 
m  conjunction  with  the  Accountant,  com- 
pare daily  all  the  entries  in  the  Cash  Book 
and  Supplementary  Cash  Book? 
Is  the  daily  comparison  of  entries  in  the 
deposit  ledgers  carried  out  in  every  par- 
ticular as  required  by  the  rules? 
By  what  officer  or  officers  is  this  daily  com- 
parison made? 

Does  the  Teller's  Cash  Book  show  that 
the  Cash  has  been  examined  daily  by  t)»' 
Manager? 

671 


Yei 

Yes 

Yes 

No 

No 

No 
No 
No 
Yes 


Yes 


Yes 

Mgr. 


Yes 


M 


672 


!'       •! 


Ii^ 


JRTI.KS  A\n  REG ILATIOVS 
QIESTIOX 


"'  uttoil  at  irregular  intervals'-' 

i^oes  the  Manager  in  making  the  daily  ev 

animation  of  the  Teller's  (\1]!  '  x. 

f-Kli  J»  ^'"^    nmrs  i  asli,  open  the 

c^»h  drawers  and  examine  the  eomnarf 
nient  to  see  that  no  cash  has  beenXrou^" 
Is  a  letter  on  file  from  the  Express  Con  ' 
pan.es  stating  what  offieers  a  eSorized 
to  sign  for  money  parcels?  ^"^^«"z^d 

;.r  T"''-''  P-?'"'''"'''  fJ'^l'vered  by  the  Ex- 
press Companies  direct  to  the  TellTrl     '^ 
Has  the  Post  Office  been  notified  what 

m7VX^JrT  ^^'C  ^  '^'^'^-^  Jitter 
spondenc"^'   "*^^    ^"^    ^^--^^    — 

Who^opcns  letters   and   looks  after    en-  | 
Who  conducts  the  general  correspondence' 

o/'^trut^a^'r^^^'-p^^^^'-^p-'^ 

Is  the  Manager's  Diary  carefully  kept' 
Is   the  Record   of  Special  Arrangement^ 
properly  written  up?  '■•mgement., 

Pli' Book^'""  ^°^'^°"'"^  ^-'-^^  Bank 

^g  :i!:.^Srp  --^  ^-  ^— ^ee. 

n  tes  and  bil  s  discounted,  held  for  collec- 
tion, or  as  collateral  security? 
How  often  is  this  done' 

Where  are  thebillcaseskeptduring  thedav? 

>Mio  have  access  to  them? 

When  taking  over  the  notes  on  the  day  of 

diaries?  tijscount  and   collection 


\ 

Y 

Y( 
U 

Ac 
Ac 

No 
Y- 

Yes 

Yes 

Mgi 


Mgr 

Dail 
Mgr's  cus 

Mgr 


Yes 


FOR  BANK  ROITIXE 


573 


No. 


QUESTION 


I 

I  ANSWER 


Is  prompt  enquiry  made  for  all  hills  re- 
milted  for  w'lich  returns  have  not  been 
received  in  good  time? 
Are  all  debits  to  Charges  Account,  Ex- 
change and  Commission  Account,  Interest 
Account,  Teller's  Overs  Account  and  all 
Iivp(>r.sonal  Accounts,  also  all  correcting 
en  ries,  initialed  by  the  Manager,  or,  in 
hi  a!)sen(c,  by  the  Accountant? 
Ar '  the  signed  receipts  for  checks  com- 
pared by  the  INIanagerf  or  Accountant 
with  the  balances  in  the  ledger,  and  are 
his  initials  placed  opposite  each  balance  as 
a  proof  that  this  has  been  done? 

t  DcIiU-  "or  Accf."  if  Accountant  acts  as  Teller  or 
F>f<lj;cr-ko('iM>r. 

Are  the  balances  of  all  current  deposit  ac- 
counts confirmed  monthly  as  far  as  possi- 
ble and  the  checks  surrendered? 
Does  the  Manager  control  by  lock  and 
key  and  paper  seal  the  entry  and  removal 
of  sheets  for  all  Loose  Leaf  Deposit  Ledgers 
in  use? 

*  Does  the  Accountant  read  the  Manager's 
correspondence  with  Head  Office? 

*  This  question  applies  only  to  branches  where  there  is  a 
regular  appointwl  accountant. 

Does  the  Accoimtant  examine  all  State- 
ments and  Returns  before  they  are  placed 
before  the  Manager? 

Are  all  blank  draft  forms  locked  in  the 
safe  at  night? 


SECTION  III.    The  Teller 

Is  the  door  of  the  Teller's  box  secured  by  a 

spring  lock  under  his  sole  control? 

Is  the  Branch  Seal  kept  under  lock  and 

key  when  not  in  use? 

Does  the  Teller  ever  make  any  entries  in 

the  Pass  Books  of  customers  or  in  the 

Deposit  Ledgers? 


Yes 


Yes 


Yes 

Yes 

Yes 
Yes 

Yes 


Y 


es 


Yes 
Yes 

No 


M 


I 


1    !^- 


If 


m 


674 


Rl  LES  AM)   RKGI  LATIONS 


urn 


Rule 
No. 


QIESTIOX 


Does   the   Toller  over  hold   in   liis   Cash 
checks  cashed  Tor  any  officer  of  the  hank? 
Are  unpaid  notes  or  checks,  or  other  such 
items,  ever  held  as  part  of  the  Teller's  Cash 
over  night? 

Does  the  Teller  mark  in  the  Discount 
Diary  day  by  day  how  each  note  is  taken 
up,  whether  by  the  endorser,  by  the  prom- 
issor,  or  dishonored? 

Are  all  money  parcels  and  deposits  re- 
ceived by  mail  or  expres; ,  credited  and 
acknowledpfed  on  day  of  receipt? 
Are  the  public  encouraged  as  much  as  pos- 
sible to  make  out  their  own  deposit  slips, 
requisitions  for  drafts,  etc.? 
Are  deposit  slips  made  out  by  officers  of  the 
bank  signed  or  initialed  by  the  customers? 
Is  a  deposit  slip  ever  returned  to  a  cus- 
tomer instead  of  being  passed  direct  to  the 
ledger-keeper? 

Is  money  ever  received  for  deposit,  or  in 
payment  of  notes,  or  for  anv  other  purpose, 
by  any  officer  other  than' the  Teller? 
Are  all  entries  posted  in  the  ledger  before 
being  made  in  the  customers'  pass  books? 
When  money  is  received  by  the  Teller  too 
late  to  be  pa.ssed  through  the  books  that 
day,  IS  the  amount  entered  by  him  in  his 
blotter  for  the  following  day,  the  voucher 
initialed  and  handed  to  the  Accountant? 
If  the  above  is  a  customer's  deposit,  is  it 
entered  at  once  in  the  ledger  by  the  *Ac- 
countant? 

♦  At  branches  where  the  Teller  also  aets  as  Aceountant, 
for   'Accoiintanl  "  substitute  "Manager." 

Is  the  Teller's  "Paid"  stamp  impressed  on 
all  debit,  vouchers  and  branch  drafts  at 
time  of  payment? 

Is  the  system  adopted  in  recording  in  the 
Teller's  Cash  Book  the  amoimt  of  the 
bank's  notes  paid  out  each  day  such  as  to 
ensure  accuracy.' 


FOR   BANK  ROITINE 


«75 


No. 


QUESTION 


Air  Iho  instructions  in  regard  to  mutilated 
notes  properly  observed? 
Does  the  Teller  ever  purposely  tear  or  dis- 
figure, or  further  mutilate,  any  bank  or 
I  dominion  note? 

Is  the  Register  of  Parcels  Despatched  and 
K(>('eived  checked  by  the  Manager  or  Ac- 
countant with  the  advices? 
Are  notes  of  other  banks  remitted  for  re- 
demption to  the  nearest  clearing  center  as 
soon  us  they  reach  an  amount  of  $1,000.00? 
Arc  money  parcels  counted  and  sealed  by 
two  officers  in  the  presence  of  each  other? 
Are  parcels  for  deposit  with  other  banks 
always  sent  out  properly  sealed? 
Arc  deposits  for  other  banks  and  money 
parcels  for  the  Express  or  Post  Office  taken 
out  by  two  officers? 

Is  the  Teller  one  of  the  two  officers  to  tj. . 
part  in  the  sealing  and  despatch  of  mont^ 
parcels?     If   so,   is   the  joint   continuous 
custody  required  by  this  rule  observed? 
Are   the   requirements  of   the   Insurance 
Companies  covering  money  parcels  com- 
plied with  in  every  particular? 
Are  parcels  of  money  and  registered  letters 
opened  in  the  presence  of  two  officers? 
Is  the  Treasury  Cash  under  the  joint  con- 
trol of  the  Manager  and  Accountant,  and 
is  it  examined  at  least  once  a  month? 
Are  the  securities  deposited  for  safe-keep- 
ing, or  as  collateral,  kept  in  the  Treasury? 

Are  these  securities  always  entered  in  the 
Securities  Register? 

Arc  receipts  taken  in  the  Securities  Reg- 
ister for  securities  surrendered? 
Are  all  returned  items  from  other  banks 
presented  to  the  Manager  o**  Accountant, 
and  are  the  debit  slips  therefor  signed  by 
one  of  these  officers? 


ANSWER 

Yes 

No 

Yes 

Yes 
Yes 
Yes 

Yes 

Yes 

Yes 
Yes 

Yes 
Yes 
Yes 
Yes 

Yes 


ff  ■! 


II 


f  I 


i  s 


.Me 

Riil. 
No. 


RULES  AND  RECrXATIOXS 


QIESTION 


SECTION  IV.    Deposit  Business 

Are  accounts  ever  ope.  .  ,„  the  Current 
Account  Ledger  without  the  uuthoritv  of 
fne  JNIanager? 

;Vo  f  ^^/^^"•''^^d  particulars  entered  at 

the  head  of  every  deposit  account? 

Are  Trust  Accounts  with  Trusts  specified 

clinunated  as  far  as  possible? 

Is  a  declaration  on  the  special  form  8  ob- 

tauied  for  every  joint  account? 

Is  every  account  in  the  ledgers  properly 

imle^ed,  even    though   consisting^f^ne 

Are  dishonored  notes,  checks  or  bills  ever 
charged   to  a   customer's  account   when 
there  are  not  sufficient  funds? 
Are  the  checks    or   debit  slips  for  with- 

.tlSTaily'  """""'  ^""""'  ^'"^"^'^^ 
nightF  '"'"''^'P'^"''*^   ^^^'"P  J«^'I^^d    up   at 

Are  checks  ever  surrendered  before  the 
receipt  is  signed  by  the  customer  or  his 
attorney? 

Are  customers  ever  delayed  in  receiving 

I  back  their  pass  books?  ^ 

Is  a  husband's  authorization  held   for 

every  account  in  the  name  of  a  married 

$500?"      ^""'"^    *   ''^'''""'^    ^°   ^"^^^^  «f 

*  F..r  branches  in  the  Province  of  Quebec  only. 

Is  interest  on  Savings  Accounts  computed 

on  imnimum  monthly  balances  ? 

Are  Savmgs  Bank  Pass  Books  alwavs  sur- 

Are  Pass  Books  of  closed  Savings  Accounts 


Yes 


R)R  BANK  ROITIM; 


CilKSTIOV 


Are   instructions    repirding   lost   Savings 
I'uss  Jiuuks  observed? 


SECTION  V.     Collections 

Is  every  bill  received  for  collection  regis- 
tered on  the  day  of  receipt? 
Are  collections  presented  for  acceptance 
on  the  day  they  are  received? 
Is  every  bill  initialed  for  in  the  Register  by 
the  Manager  or  other  senior  officer,  and  its 
entry  in  the  Diary  checked? 
Are  collections  held  unaccepted  more  than 
48  hours  without  instructions  lo  hold,  or 
advice   to   the   branch   or   ccnespondent 
from  whom  they  were  received? 
Is  a  copy  of  this  advice  kept? 
Are  reasons  for  returning  unjiccepted  col- 
lections always  stated  on  the  back? 
Are  bills  received  for  collection  ever  held 
overdue  for  the  convenience  of  customers 
without  authority  from  the  remitters? 
Are  receipts  taken  for  collections  returned 
to  customers? 

Are  all  blank  money  order  forms,  except 
the  supply  in  the  hands  of  the  Teller,  kept 
in  the  Treasury;  also  all  Travelers' 
Checks,  Letters  of  Credit  and  Deposit 
Receipt  Forms? 

Are  all  other  draft  forms  kept  in  a  locked 
cupboard  under  the  control  of  the  Man- 
ager or  Accountant? 
Are  depositors'  signature  cards  in  order? 


SECTION  VI.    Correspondence 

Are  stamped  signatures  of  officers  ever 

used? 

j  Are   all   bills   remitted   initialed   for    by 
I  proper  officers? 
C— VIII— 37 


ANSWER 


Yes 


Yes 

Yes 


Y 


es 


No 
Yes 

Yes 


No 
Yes 


Yes 


Yes 
Yes 


No 
Yes 


mS 


Riilo 
No. 


in  m:s  a\i>  i{i;(iri,.Mi(».\s 

QI  KSTIOX 


Are   all   Cimilars  rojul   jitul    initijilrd   l)v 
every  nu'inlu'r  of  the  sliill'? 
Arr  any   comimmic  alioiis   mado   l)v   Post 
(  ani  otluT  than  those  allowed  Uy  Iho  rule? 

SIX-nON  VII.     iiKvn  Okkh  ^:  liKTvum 

Arc  particulars  of  oacli  sliipmont  by  in- 
sured mail  entered  on  the  form  provided 
on  file  (1(11/  of  .shiptuentY 
Are  pai.l   drafts,  adviees  of  eredit,  ete., 
eheeked  off  daily,  ininiediatelv  on  receipt 
and  bt^orc  bein^  entered  in  the  C^ash  Book> 
Are    all    deposits    and    transfers    between 
offices  advised  l,y  si)ecial  letter  signed  by 
the  Manager  und  Accountant  in  addition 
to  the  regular  "At  Oedit"  advice' 
Is  the  junount  stated  both  in  words  and 
figures  in  these  letters? 
In  acknowledging  telegrams  is  the  copy  of 
u  code  message  ever  enclosed  in  the  same 
envelope  with  the  translation? 
Are  all  code  messages  received  and  des- 
patched confirmed  by  first  mail? 
Is   the   telephone   ever   used   to   transfer 
money,  or  order  or  advise  parcels' 
Are  all  expenditures  for  telephonic  or  tele- 
graphic messages  or  otherwise,  in  connec- 
tion with  the  customers  or  emplovees  col- 
lected from  such  customers  or  emplovees? 
Is  any  advertising  expense  incurred  except 
that  which  IS  authorized  by  Head  Oflice? 
Are    the    different    books    and    accounts 
t>alanced  periodically  as  instructed  in  the 
rules? 

JVhat  officer  posts  the  General  Ledger? 
Does  the  Teller  ever  write  the  Cash  Book? 
Does  the  Manager  keep  keys  to  loose  leaf 
deposit  lerlgers  m  his  possession,  and  super- 
vise the  entry  and  removal  of  sheets? 
Are  loose  leaf  de])osil  ledgers  sealed? 


FOR   BANK  KOI  TIN K 


57!) 


NV. 


QIKSTIOX 


Is  I  lie  hank  ever  loft  in  charge  of  one  officer 
during'  business  lionrs? 
Are  tlie  Imnk  premises  carefully  examined 
oil  Sundays  and  holidays? 
Ar(^  the  office  and  cellars  examined  every 
night  by  the  watchman,  or  some  officer  of 
the  bank? 

Is  the  safe  door  kept  closed  and  locked 
(luring  the  day? 

Are  the  combinations  of  outer  door  of  safe 
and  of  Treasury  Compartment  in  the 
divided  custody  of  two  senior  officers, 
each  holding  one  lock? 
Does  the  same  officer  liold  combinations  or 
keys  of  both  outside  and  inside  vault  doors? 
Is  the  setting  of  Uie  time  lock  properly 
f)erformed  ? 

Is  the  setting  checked  by  the  Manager  and 
does  the  responsibility  for  its  operation  rest 
always  with  two  officers? 
Is  the  vault  door  kept  closed  during  the 
day? 

Is  the  custody  of  combinations  so  arranged 
that  it  is  necessary  to  have  the  co-operation 
of  two  officers  in  order  to  obtain  access  to 
the  vault  or  safe? 

Are  combinations  always  reset  when  trans- 
ferred from  one  officer  to  another,  even  for 
a  short  time? 

Is  the  stationery  n  refully  assorted  and 
kept  under  lock  and  key  in  the  custody  of 
the  Manager  or  Accountant? 
Are  all  Powers  of  Attorney  numbered  and 
entered  in  the  Register? 
lias  any  Power  of  Attorney,  on  being  re- 
voked, passed  out  of  the  Bank's  possession? 
Are  Suits-at-Law  ever  entered  in  the 
Bank's  name  for  the  convenience  of  cus- 
tomers or  others? 

Have  Non-Trading  Partnership  Agree- 
ments been  obtained  from  every  firm  of 
Architects,    Solicitors,    Accountants,    In- 


ANSWKR 


No 
Yes 

Yes 
Yes 

Yes 

No 

Yes 

Yes 
Yes 

Yes 

Yes 

Yes 
Yes 
No 

No 


I. 


tiflT'' 


4 


11 


..■;»i 

Itnlr 
No. 


in  l,i;s  A.\M   KKCI  I.ATIONS 
QIKSTION 


snrai.co     \^r(.„fs,    oi,..,    |,.,vi„^r    (li.s(.„„„t 
tran.su<-li,)...s  willi  H,,.  Hank--- 
Are  any  Loiters  „f  (J.mruiitcc  l.ol.l  ..li.er 
than  those  <„,  the  Bank's  regular  f»rni> 
Is    eyor^v    assignment    of    fire    insurance 
assented  to    ,y  the  Company  issuig  the 

offiSr'''"  "'^'"^^"'•^  "f  ^n  autuorized 
Is  the  distribution  of  insurance,  if  coverinc 
more  than  one  item,  carefully  scrutinized? 
Are  the  dates  of  expiry  of  all  policies  en- 
ered  m  the  .ALmager's  Diary  and  checked 
by  a  second  officer? 

Are  any  policies  held  with  assignment  to 
the  Bank     as  its  interest  may  appear"? 
Is  the  effect  of  the  80%  co-insurance  clause 
always  borne  in  mind? 
Is  a  written  acknowledgment  held  from 
the  insurance  company  of  every  assign- 
ment to  the  Bank  of  a  life  insurance  policy? 
Is  the  age  of  the  assured  admitted  on  eyery 
policy  assigned?  *^ 

Is  the  due  date  of  eyery  premium  entered 
m  the  Manager  s  Diary  and  checked  by  a 
second  officer?  "^ 

Is  care  taken  to  preserve  the  identity  of 
J  every  debt  against  which  mortgages,  ware- 
house receipts,  customers'  notes,  etc.,  have 
been  pledged  as  collateral,  by  retaining  the 
original  notes  and  all  renewals? 
Are  the  rates  of  commission  on  checks  and 
drafts,  and  the  rates  of  interest  on  notes 
discounted   marked   by   the  Manager  in 
cipher?  ** 

Is  a  general  waiver  or  protest  held  from  all 
customers  who  require  indirect  advances 
of  any  kind? 

Are  Rating  Cards  filled  out  for  every 
borrower  whose  total  liability  direct  and 
indirect  reaches  $  —  -,  and  are  copies  of 
these  cards  sent  to  Head  Office? 


FOR  nwK  nolTIXE 


Ml 


Kill' 


gi  KSTION 


Doi's  the  Manager  initial  all  paper  dis- 

coiinted? 

Are  the  addresses  of  all  <>I)Iij;ants  on  notes 

discounted  writ  ten  under  the  names? 

Are  notices  of  notes  discounted  maturing 

sent  reguhirly,  and  how  long  in  advance  of 

jnaturity? 

Are   notices   sometimes   sent   to   indirect 
ol)ligants,  particularly  when  the  amount  is 
large,  or  the  signature  not  well  known? 
Are  hills  payal)le  at  points  where-  there  are 
private  hanks  hut  no  chartered  bank  for- 
wardetl  for  acceptance  and   return,   and 
held  until  ten  days  before  maturity  and 
then  forwarded  for  collection? 
Are  any  notes  or  bills  discounted  for  less 
than  a  minimum  charge  of  fifty  cents? 
Are  the  maturities  of  notes  discounted, 
their  formal  correctness  and  the   calcula- 
tions  of   interest   and   exchange   checked 
daily  by  a  senior  officer? 
Are  all  notes  under  discount  checked  off 
with  the  Diary  once  a  njonth,  the  Diary 
having  been  previously  balanced? 
Do  Liability  Statements  include  all  Over- 
drafts, Short  Date  Drafts,  etc.;  in  fact  all 
obligations    to    the    Bank    of    whatever 
nature  they  may  be? 

Are  demand  notes  ever  discounted  without 
the  authority  of  the  General  Manager? 
Are  all  stocks  held  as  security  for  loans 
properly  hypothecated  on  the  Bank's  Form? 
Is  borrowing   by   way   of  overdraft   dis- 
couraged as  much  as  possible? 

Is  interest  on  overdrawn  accounts  charged 
monthly? 

Is    interest    on    demand    notes    collected 
monthly? 

Is  the  interest  on  demand  notes  ever  added 
to  the  principal? 


A.NSWKU 

Yes 

Yes 

Yes 
10  days 

Yes 


Yes 
No 

Yes 
Yes 

Yes 

No 

Yes 

Yes 

Yes 

Yes 

No 


H 


;s 


,i,,i 


Hull- 

No. 


~J'l^  AND  HKta  LATIOXS 
WrKSTION 


"Um"  •'?""'"'  ""^'''*  '•""'"'"  the  words 
.nonlmn,.,!?  ^' '     *'•'  '"**'  ''^''"^ 

I«   the   iMj,.r«..st    <H,   all    noUs   .Jisn,,,,,.,.,! 
^m;>^..hn,  .li.v,  loans  ..ollect..;  illt;. 

Is  parf.Vular  (arc  taken  t.,  ^ruard  against 
Sf^ul  W  «»f  '."'y  debtor  throngh  he 
^tutnte  of  Lmutations,  an.l  to  make  ti  ndv 
reference  to  Head  Offic-e  of  any  debt  "  uS 
are  almnt  to  prescribe?  ^ 

-nonl^^'"""!""",'.'^^'^'''^*^''-  '"^'«n«''l  once  a 
-nonth  l,y  cheeking  it  with  the  coHatera 
notes  on  hand  or  remitted?  *^""'^t<^'''i' 

Cnufr   ''""•^t^"''^^'   n"t<'«   entered   in    the 

dm     I  ;""    ^'f  ^    ""*'^"'-   t'>^''>    respect  ve 
due  dates,  and  are  all  overdue  t;A,Ll\ 

entered  i„  the  Past  Due'cfcl^'lT  R^ 

Have   all  advances  of  $ or  over  been 

uutljonzed  by  the  General  Manager 

e  ciit  ete'rel  "'?  'M  '''''y  «"thorized 
XreLX  '"'  ^''^  ^Y-'^nager's  Diary? 

Are  each  season's  credits  in  lumber  and 

Is  a  record  kept  of  all  trade  bills  disconnterl 
remitted  collaterals,  and  casl    ttis  "vS 
have  l,een  returned  unaccepted  with  the 
reason  for  refusal?  «  **it"  me 

Are  there  any  accounts  such  as  rent  taxes 
etc.,  due  and  unpaid?  '         ^' 

Tv'nl'r??''"?^  ^''"^  letters  satisfactory? 
Is  care  taken  to  see  that  the  year  is  entered 
with  the  date  for  the  first  entr' of  each 
year  and  at  the  head  of  each  ne^  pLeP  '' 
Is  the  existence  and  value  of  goo,ls  aSn'ed 
to  the  Bank  under  Section  88  and  of Xj' 

Bv  wl.  .f     ffi '  ""^  ^'''''^  P"^^  ''  '"""th? 

uAdrand  ^         "  '''''  '^''''  examinations 
uiuut  and  IS  a  proper  record  kcjit? 


Ye 
Ut 
Ye 


FOR   HANK  ROITrNF, 


.^8.1 


Klllr    I 


gi  i;sTio\ 

Arc  till'  pHMTi'ds  from  sjiltvs  (»f  ^oods 
|)I«m1^'('(I  to  llic  Hatik  (l('|>o.sil(>t|  to  a  col- 
lulml  uccoiiiit  aihl  from  tliciicc  applicii  uii 
llir  (l<-l)(? 

Wli(»  vcrifirs  the  mptitatioii  of  Iiilcrrst 
on  (Irposils? 

Who  verifi<'s  tlu'  computation  of  interest 
ill  llie  (li.scouiit  (IcpurliiU'iit? 

Arc  ull  (it'iicral  Munagcr's  rircular.s  filed 
in  the  Circuhir  Book? 

Where  are  the  Code  Books  kept? 
Whenever  money  is  phiced  in  the  Treas- 
ury or  withdrawn  therefrom,  are  two  .senior 
ofKeer.s  alway.s  present,  and  is  the  amount 
entered  in  the  Treasury  Book  and  initialed 
by  both  officers? 

Are  postage  stamps  properly  supervised 
and  placed  in  the  vault  at  night? 
Is   the   Manager   keeping   an   up-to-date 
record  of  customers'  standing,  etc.,  and 
in  what  form? 

Are  commissions  received  on  cliecks,  etc., 
verified  by  the  INIanager  and  comi)are(l 
with  the  credit  slip? 

Is  the  Teller  provided  with  a  list  of  the 
principal  customers,  indicating  the  limit 
within  which  uncertified  checks  on  other 
banks,  or  items  payable  out  of  town,  may 
be  accepted  from  each? 

Is  a  record  kept  of  the  numbers  of  blank 
draft  forms  received? 
Are  draft  forms  ever  signed  in  blank? 
Are  notes  signed  in  blank  ever  accepted? 
Are  any  endorsed  demand  notes  taken? 
Is  every  signature  to  a  l)ill  by  mark  wit- 
nessed by  an  independent  witness? 
Is  there  a  sufficiency  of  firearms;  are  they 
kept  within  easy   reach  during  the  ilay, 
taken    to    the   sleeping    rooms    at    night, 


A  NSW  i:  II 


Yes 

Ac  L. 
Acct. 

Yes 

Vault 


Yes 

Yes 

Yes 
Yes 


Y 


es 


Yes 
No 
No 
No 

Yes 


s 


i 


fl 


It  III.- 
s». 


Jll  I.KS  AM)  HK(;(  LVTIOVS 
Wl  KSTIo.N 


ruTfcJ   wah.  properly  c-urc-d  for  „ ml  fe 
o<«».s.o„HlIy  Jo  see  that  tl.ry  are       «,S 

Hiivv   any  CMrpJions   lo   Ihr   RuKs  arul 
Hr«,,laho„s  l„.,.n  a„ll,ori/o,l  l.y       /  (    .„ 
oral  Manager  for  this  branch? 
W  «o.  Kin.  particulars  with  rule  numbers. 


..hl^«;;!r  i;;::::/';::.':::"  "•""'"^'^  ""''^^^'^ '"  -«'- 


STAMI*  nri'IKS  ON   FORKIGN   DRAFTS 

rill  Ntiiiiip  (IiitioH  of  the  VHiiiMiH  tountriis  an-  so  involved 
ami  \.irv  to  nucIi  ail  i-xtciit  that  it  in  only  possihle  to  give  htiv  a 
»vii.i|)>i.s  of  lliose  wiiich  olitain  in  (iri-at  Britain,  Fnintf  aii<l 
(niiiiany.  Roughly  !i|K-aking,  for  rate-making  purposes  the 
>t.iiii|)s  may  be  ealcuhited  on  a  hasis  of  half  of  one  per  mill 
»)!•  :_,'j  of  1  per  cent, 

GRKAT    BRITAIN    AND    IRKLAND 


(lucks:  Rills  of  Exchange  payable  on 
demand  or  up  to  three  days' 
sight 


Id  irrespective 
of  amount. 


VrnmUxorjf  Notes:  1  shilling  per  £100  or  fraction  thereof. 
All  other  bills  of  exchange: 


Not  exceeding  X5 

Exceeding    W  and  not  exceeding    £10 


Id 


M 


a 


M 


M 


10 

50 

75 

100 


S5  3 

50  6 

75  9 

100  Is     - 

200  2s     - 


for  .very  additional  flOO  or  fraction  thereof  Is 


Rills 


ill  foreign  money  are  staiiiju-d  at  the  rate  at  which  they 


lie  llr"()tiali'd. 


/: 


III /it 


Rill 


l<=>a,  of  Ireland,  dmft 
1 


s  issued  by  the  Rank  of  England  or  by  tl 


ic 


s  or  iiiclcrs  drawn 


bv 


aiiv  itatiKi-r  in 


Ih 


i;il(i 


I  Kiiigilom  upon  any  other  banker  in  the  T^iitcd  Kiiigd 
I  |i  iv.il.lc  fit  bearer  or  to  order,  and  only  used  for  flir  piir) 


om 


lose 


585 


I 


*^  APPENDIX 

••f  M-UllMg  any  .uTminf  hotum,  s,ul,  IkimUts,  letters  of 
and  Inlls  drawn  l.y  gcvornnKnt  depailinent... 

Tlje  duty  on  a  bill  of  exchange  drawn  or  expressed 
payal.  o  out  of  the  Unitecl  Kingdon,  where  actually  paid 
«  '»rs,.,|  or  n.  any  manner  n.-gotiated  in  the  United  Ki„ 
shall  where  the  amount  for  which  the  hill  is  drawn  exceed 
he  reduced  so  as  to  he,  when  the  an.ount  exceeds  fSO  an. 
not  exceed  flOO,  Gd.  When  the  an.ount  exceeds  £100,  tlu 
•s  6d  for  every  £100  or  any  fractional  pa'rt  of  £100. 

V\hen  bdls  are  drawn  in  sets,  one  of  the  sets  requires 
stanjped  Adhesive  stamps  n,ay  be  used  for  bills  drawn  al 
but  for  bills  drawn  in  the  country  embossed  stamps  must  be 

FRANCE 

(Including  Algeria  and  Senegal) 

Checks  drawn  "A  vue"  {the  date  of 
■which  must  be  written  in  words)  if 
payable  in   the  town  where  they  are 

drawn    -n       «,  -^ 

—  Fes.  0.10 

Otherwise  —    "      0.20 
Bills  of  exchange  not  exceeding  fcs.  100  —    "      0.05 
For  every  additional  fcs.  100  or  fraction  —    «      0.05 
Bills  passing  through  France  by  endorse- 
ment only — 

Not  exceeding  fcs.  2,000 _    ««      q  gQ 

From  fcs.  2,000  to  fcs.  4,000 .  __    «<      j 

For  every  additional  fcs.  2,000  or  frac- 

'•°" -    «      0.50 

GERMANY 

Checks: 

n  II      f        1  M.  (} 

JJills  ot  exchange  not  exceeding ]VT.  200 M    Q 

Exceeding  l\r.  200  and  not  exceeding  400  —         fl 

;;  "   *««     "       "  "  600  _  0 

1  "   «««    "       "  "  800  -         0 

^     ,,,."««"    "       "  "  1,000- 

Each  additional  1, ()()()  ,„•  part  thereof 


APPENDIX 


587 


Iters  of  credit 

pressed  to  b« 
Lv  paid  or  en- 
fed  Kingdom, 
I  excveds  £.150, 
fSO  and  does 
100,  tlie  duty 
00. 

equirc's  to  be 
rawn  abroad, 
must  be  used. 


I'l.  avoid  tbr  sliinip  tax  diocks  011  Germany  .should  bear  the 
loilowiii^  words  written  after  name  of  tlie  drawee  bank  "Pay 
ji^rjiiiist  tliis  check  from  our  credit  balan.-e." 


0.10 
0.20 
0.05 
0.05 


0.50 
1. 

0.50 


M.  0.10 

M.  0.10 

0.20 

O.30 

O.40 

M 

M 


.388 


APPRXDrX. 


rfirn 


the  history  of  the  "old  n^r  »f        .  '''"''*   ^^^""n 

Broflv  stated    tl,o  P,.  °       '  '°"'  '"  1'"'^'  8"™. 
and  card  ,„„,„^  „f  t  ,"  pt!  ,      ;"''  '™''"""'  """I"-"'' 

countries   for  ,1,  cim.Y.tlnJ       T  "''''■'•  *■"'"«  -'  ■>< 

-nl  found  it  ncooss.::  tZp  'rt  ,"""■  """  ""«'''*  «"- 
-I.  billed  dollar,  for  tl,o  p  !"  ,,  ,1^  *"'"""""  "^  ">'  ^p. 
""•I  »ork.,,  „.,,;,,,  ,^,,  :  „-^"^  J"    "/  "'-  """.v.  puMie  .upp, 

■>'  ^*-*H  per  p„u-:r  M- ;'  t  t-  "\t-  '•"■ '- "-" 

".lopted  the  par  value  of  tlu  Iu„  "/  T-"^  """■  "'^■''  -' 

<■«.  eolonies.     Tl,l,rra,,   ,, f  I  IT''^  T""'"'"  "'  ""  '^">" 
Pnr  of  ,.Ml,„„ge,"  and  H„.  ,„.        .'      '"  "  '■''  '"  ''■'""'  "«■  ""I 

'-n,  of  „per;„,,,„,.  .,;•;;,;:;;:-,,•.;;-;;;;.-..  «^ -, 


AITKNUIX 


589 


'"ff    Stcilillff 


,,^  ,rin,ic..ii>  l)v  iii.)st  auHioriliVs.  Ac.-oidin^r  f„  one  author, 
(Iw  S|.,Mii>h  dollar  contaiiitd  at  thai  period,  38.5  grains  of  pure 
mIvct.   while   }.'0   Vlu^rUsh   .shillin^rs   eoiitained    1718.709   grains 

|Mllt'. 

'I'liiis  the  value  of  the  Spanish  dollar  would  be 
"in^^M  =  4.480106s.  =  4s.  5{'^^. 
anil  the  value  of  the  sovereign 

^^p^  -  $4.46417. 
Ill   nOii  the  act  establishing  the  United  States  mint  Mas 
|..is.nl.  and  we  now  find   the  legal  weight  of  the  silver  dollar 
-n.ii  as  JJTl.yS  grains  of  pure  silver,  while  the  weight  of  the 
Kii^iisli  shilling  remained  unchansred. 
The  sterling  equivalent  of  this  new  dollar  is 
^Tfim  =  4-3201S.  =  4s.  3/gVd. 
.111(1  the  value  of  the  sovereign  in  terms  of  that  dollar 

^gff  =  $4.6295. 
In  1H!}7  the  United  States  altered  the  ratio  between  gold  and 
Sliver  from  15.1 :1  to  15.988:  1.     This  undervaluation  of  silver 
practieally  made  gold  the  standard  of  value  and,  from  this  time 
<».,  we  have  to  deal  with  the  relative  value  of  the  pure  gold 
c.ntamed  in  the  sovereign  and  in  the  gold  dollar  respectively. 
1  !..•  gold  dollar  co.itains  23  »2  grains  of  pure  gold,  and  the 
sovniign  113.001605. 
The  gold  dollar  has,  as  its  sterling  equivalent, 
mMS  =  49.3161d.  =  4s.  l/^,d. 
■iiul  the  sovereign,  expressed  in  terms  of  the  gold  dollar,  is 
n^ocmns  ^  $4.86656. 
This  is  now  the  "mint  par"  between   North  America  and 
(Jr. at  Britain,  or  an  advance  of  9.497679  (approximately  9\ 
p«  r  cent  on  the  old  legal  par  of  exchange  of  4.444f     By  an 
act  of  Parliament,  $4.86ii  per  pound  sterling,  or  9^  per  cent 
premium  on  the  old  par,  was  made  the  legal  par  of  exchange 
tor  Canada.     The  United  States  continued  to  quote  sterling  bjr 
premium  on  the  old  par  of  exchange  until  1873,  when  it  was 


590 


APPENDIX 


sensibly  abolished.  Owing  to  tbo  light  weight  of  the  so\ 
at  that  time  (lia.149  grains)  the  actual  premium  stood  al 
9  per  cent. 

Method  of  conrcrsionn.—T\w  advance  is  reckoned  as  sf 
per  cent  on  ,$4,444,  the  old  value  of  the  pound.  There 
per  cent  premium  amounts  to  .355,  which  added  to  4. 
$4.80  per  pound,  and  so  on. 

Find  the  value  of  a  draft  for  £100  at  9^  per  cent  premi 

Old    par   of  exchange $4.4444 

To  which  add  91^  of  itself 4055 


or  $485  for  the  £100  draft. 

What  is  the  premium  when  £1  = 
Deduct  old  par  of  exchange.  .  . 


4.8500 

$4.8666 
4.4444 


Advance  over  old  par.  .  . 
which  works  out  4.444:  100 


A222 


.4222 :  9i^. 
This  method  may  be  simplified  into  the  following  rules 

(1)  To  convert  from  a  premium  quotation  to  currency 
the  decimal  point  one  place  to  the  left  and  divide  1 
The  currency  equivalent  of  109J  by  this  rule  would 
out  as  follows: 

10.91  ^2i=^X|- 4.85. 

(2)  To  convert  from  a  currency  to  a  premium  quot 
move  the  decimal  point  one  place  to  the  right  anc 
tiplyby2].     Thus: 

48.6?,  X  2]  =  109i  or  9^  per  cent  premium  on  the  old 

"  These  two  rules  are  based  on  the  fact  that  at  the  old  par  of  excha 
dollar  was  worth  nme  English  sixpences,  of  which  there  are  forty  in  the 
therefore — 

40        10 

£l=— or  — 

9       2Ji 

,       9       iH 
£l=— or  — 
40       10 


APPENDIX 


591 


Now,  as  Canadian  quotations  between  banks  advance  by  sixty- 
fourtlis,  it  will  often  happen  that,  in  converting  from  a  currency 
to  fi  preiiiium  quotation  by  the  above  method,  some  difficulty 
will  be  found  in  expressing  the  decimal  to  the  nearest  sixty- 
fourth.  Tsually  a  table  has  to  be  referred  to,  unless  the 
onirator  knows  all  the  fractions  by  heart.  To  avoid  either 
evil  use  the  following  simple  rule : 

Learn  the  eighths  by  heart:  the  knowledge  is  always  useful. 


J-.125 
I— .250 
§-.375 


J— .500 
t— .625 
5— .750 


I— .876 


Deduct  the  nearest  eighth  from  the  decimal  and  divide  the 
rcniiiiiider  by  sixteen.  This  will  give  the  number  of  sixty- 
fourths  to  be  added  to  the  deduction.  Thus  for  the  rate  $4.8298 
«e  have  by  the  rule 

48.298  X  2^  —  108.670 
nearest  eighth  f  —        .625 


.045 

sixteen  will  go  into  45  almost  three  times:  therefore  4.8298  = 

105-;:  +  -,\. 

Another  method. — It  must  always  be  borne  in  mind  that  all 
fractions  of  the  Canadian  quotations  arc  a  fractional  percentage 
im  the  old  par  of  exchange  and  not  on  the  present  value  of  the 
pound  sterling,  the  latter  being  about  10  per  cent  more.  The 
difference  between  109  and  109|  is  .5555  cents  per  £100,  while 
one-eighth  of  1  per  cent  on  $485  is  .606  cents:  a  difference  of 
51  cents  per  £100.  An  advance  of  a  sixty-fourth  in  the  Ca- 
nadian quotation  makes  a  difference  of  $6.94  per  £10,000,  or  ap- 
proximately $7.00.  From  this  fact  a  short  and  useful  conver- 
sion rule  can  be  made. 

Neglect  4.80  as  common  to  all  quotations  and  equivalent  to 
108  per  rent,  divide  the  remaining  three  figures  in  the  quotation 
l)v  7 :  neglect  the  remainder,  if  any,  and  add  one  to  the  result. 
This  will  give  the  number  of  sixty-fourths  over  8  per  cent. 


5iH 


APPENDIX 


Thus  to  convert  4.8715,  divide  715  by  seven  and  add  o 

gives  ^103  as  the  number  of  sixty-fourths  to  be  added  i 

or  Igi   =  IfV  +  ^\;     therefore   the   equivalent   for  4? 
TOO  t  4-    3  *  **^ 

'I'his  rule  is  accurate  to  the  nearest  sixty-fourth  up 
chiding  4.8875  =  9[f  +  ^V-  Afler  that,  it  will  b. 
necessary  to  increase  the  remedy  for  degree  of  error 
sixty-fourths.  This  rule  will,  of  course,  work  conversel 
C  unadian  to  currency  quotations,  by  multiplying  the  nui 
sixty-fourths  in  excess  of  8  per  cent  by  7,  and,  for  ren 
error,  deducting  1  per  cent  from  the  result: 

To  find  the  equivalent  of  9j\  +  ^V  by  this  rule,  9-^  -, 
8  -f-  ^J,  and  77  X  7  =  539,  1  per  cent  of  which,  nai 
being  deducted,  leaves  534,  and  the  equivalent  rate  is  4.8 
A  third  method.— As  already  pointed  out,  the  quo 
on  sterling  exchange  have  reached  a  point  where  exchange 
have  to  be  supplemented  by  calculations,  as  no  table  go 
thcr  than  an  advance  of  one-sixteenth  of  1  per  cent ;  to  di 
with  this  partial  use  of  tables  and  to  simplify  the  calcul 
the  following  method  will  be  found  useful  in  calculating  o 
amounts  at  close  fractional  quotations. 

The  method  consists  simply  of  assuming  a  base  or  key  n 
to  correspond  with  108  per  cent  (1728),  increasing  tl 
number  by  one  unit  for  every  sixteenth  advance  over  the 
cent  premium,  thus : 

8%  premium  is  represented  by  JgV¥ 
8t7%     " 

Oi%  (8%  +  II) 
10%  (8%  +  ff) 


« 


« 


« 


(( 


1760 


and  so  on,  each  advance  of  a  sixteenth  in  the  quotation  in^ 
mg  the  key  number  by  one ;  this  form  is  the  numerator  of  a 
tion,  of  which  360  is  the  denominator  or  diviser  common  \ 
For  example,  a  purchase  of  £10,000  (q)  9|  would  be  w 
out  as  follows : 

'■^W^'  =  W/  X  10,000  =  ^-^^M  =  $48,500. 


APPENDIX 


593 


Conversely,  a  purchase  of  $10,000  (ft'  9i  would  be  worked 
out  h.v  rcversinpr  the  fraction :  ■jY'i's  ^  10,000  =-=£ii,06l.n.  1  ^f . 

'I'lic  iisefuhiess  of  this  rule  will  he  more  apparent  when  sixtv- 
foiirtlis  and  finer  shadings  are  dealt  with,  which  arc  added  to 
the  key  number  as  fractions  or  decimals  of  a  sixteenth,  thus : 

9^  +  fiV  =  17461  or  174(50.25 
9k  +  s'r  =  17461  or  1746.50 
9*  +  B'V  =  1746^  or  1746.75 
9i  +  ik  =  1746J  or  1746.125 

\Vc  will  take,  for  example,  the  purchase  by  a  bank  of 

£10,000  @  9fV  +  ITT  =  1747.25  =  174725.00 

10,000  @  9j\  +  ^T  =  1747.50  =  174750.00 

360  =  6  X  60)349475.00 


Value  of  £20,000  @  above  rates, 


6)582458.333 
$97076.388 


Conipare  this  with  the  ordinary  method  of  working  the  same 
example  with  or  without  tables.  Remember  that  360  is  the 
divisor  common  to  all. 


London  quotations. — The  English  quotations  for  North  Amer- 
ican exchange  were  generally  quoted  in  pence  for  dollars,  ad- 
vancing by  thirty-seconds  of  a  penny,  and  the  reduction  to  an 
cqnivalcnt  American  rate  per  pound  sterling  had  to  be  done 
In-  tables  or  by  a  very  tedious  calculation.  Lately,  however,  it 
lias  become  more  and  more  the  practice  to  use  the  American 
method  of  quoting  dollars  and  cents  per  pound  sterling,  which, 
of  course,  makes  comparison  a  simple  matter.  The  old  method, 
liowcvcr,  is  frequently  found  in  newspapers  and  books  on  ex- 
change. As  there  are  no  tables  in  use  on  this  side  which  give 
the  e(|nivalent,  the  following  may  be  adopted  as  a  quick  mental 
inetliod  of  converting  the  American  equivalent  to  the  terms  of 

the  other  to  the  nearest  thirtv-second  of  a  penny.     It  should 
(—VIII— 38 


594 


AITKXDIX 


!!i 


be  rcineinlKivd  that  us  tlu«  (iollur  valiR.  „f  ti.e  jiound  i 
till-  iHi.ce  value  i)f  tlu-  dollar  naturally  decreases  and  vi( 
Thus : 

$5.(MM)0  per  I'  =  48(1.  jKjr  dollar 

4.})!.% 

4.8000         "       50 


■mi 


To  reduc-o  the  American   rate  to  the  Kn^Hi.sh  quotat 

dollar:  take  4.80  as  equal  to  .50,1.  and  deduct  from  qu, 

divide  the  remainder   hy  30;  the  whole  number  thus  o 

represents  the  number  of  thirty-seconds  of  a  penny  to 

ducted  from  50  pence,   to  ^ive  the  ecpiivalent. 

Find  the  equivalent  of  .$*.9l,%  per  t. 

$4.91.'J6  =  48000  +  '  l^^  =  50d.  -  :].T  =  48^  pen. 

$4.80(56  =  48000  +  -Ml    =  50d.  -  P  =  49^  ^„, 

$4,842.5  =  48000  +  ^    =  50d.  -  ff  =  49tV  penc 

This  rule  will  hold  good  to  $4.9199  or  48 |f  pence 
that  the  degree  of  error  beomes  appreciable.     However, 
rate  is  much  higher  than  the  gold  point,  we  need  go  no  f, 
the  Canadian  equivalent  being  lOf^. 


BIBLIOGRAPHY 


BANKING    PRACTICE 

"Manual  of  Canadian  Banking":  H.  M.  P.  Eckart. 

"(anudian  Banking  Practice" :  John  Knight.  Compiled  from 
the  .Journal  of  the  Canadian  Bankers*  Association. 

"Questions  on  Banking  Practice" :  Compiled  from  the  Journal 
of  the  Institute  of  Bankers,  London,  England. 

"The  Country  Banker" :  George  Rae. 

"History,  Principles  and  Practice  of  Banking":  J.  W.  Gil- 
bart. 

"Money,  Exchange  and  Banking" :  H.  T.  Easton. 

"Accounting  and  Banking" :  Alfred  Nixon  and  J.  H.  Stagg. 

"Banking  and  Commerce" :  George  Hague. 

"Modem  Bank":  Amos  K.  Fiske. 

MISCELLANEOUS 

"Credit":  William  A.  Prendergast. 

"Disputed  Handwriting" :  Jerome  B.  Lavay. 

"Pitman's  Business  Man's  Guide" :  J.  A.  Slater,  B.A.,  LL.D. 

"The  Annual  Financial  Review"  (Canadian)  :  Compiled  by  W. 
R.  Houston. 

"Essay  Mathematics":  Sir  Oliver  Lodge,  F.R.S. 

"Tables  for  Repayment  of  Loans":  J.  A.  Archer. 

"Inwood's  Tables,"  including  logarithms. 

"Five  Figure  Logarithms  and  Other  Tables":  Alexander 
M'AuIay,  M.A. 

"Accountancy  of  Investment":  Charles  Ezra  Sprague. 
"The  American  Office":  J.  W.  Schulze. 

TRUST    COMPANIES,    ETC. 

"Trust  Companies :  Their  Organization,  Growth  and  Manage- 
ment":  Clay  Herrick. 


505 


596 


JJIJJLKKilUPIIY 


"The  Modern  Trust  Conipaii^r":  F.  B.  Kirkbride  an 
Stcrrctt,  C.P.A. 

"Modern  Industrialism":  Frank  L.  McVej. 

"Trust  Finance":  Edward  S.  Meade,  Ph.D. 

"Work  of  Wall  Street":  Sereno  S.  Pratt. 

"Clearing  Houses,  Their  History,  Methods  and  Adn 
tion" :  James  G.  Cannon. 


BANKING    LAW 

Then  Bank  Act,  1913.' 

Bills  of  Exchange  Act.'. 

Department  of  Finance  and  Treasury  Board  Act.* 

Cu-rency  Act' 

Dominion  Notes  Act.' 

"Banking  and  Bills  of  Exchange" :  J.  D.  Falconbridge 
LL.B. 

"Bills,  Notes  and  Cheques" :  J.  J.  MacLaren,  K.C.,  D. 

"Banks  and  Banking":  J.  J.  MacLaren,  K.C.,  D.C.I 
"Shareholders  and  Directors'  Manual":  J.  D.  Warde. 
"The  Civil  Code  of  Lower  Canada:  Handbook  of  Comn 
Law":  William  Patterson. 

"Pitman's  Legal  Terms,  Phrases  and  Abbreviations":  E 
A.  Cope. 

Pratt's  "Digest  of  Laws  relating  to  National  Banks." 

Grant  on  "Banking"  (Canadian  edition). 

"The  Law  of  Banking" :  Hebcr  Hart,  LL.D. 

"The  Law  of  Banking":  Sir  John  R.  Paget,  Bart.,  F 

"Digest  of  Canadian  Mercantile  Laws" :  W.  H.  Anger, 

MONEY    AND    BANKING 

"Money  and  Currency" :  Joseph  French  Johnson. 
"Money  and  Banking" :  Horace  White. 
"The  Theory  and  History  of  Banking":  Charles  F.  Du 
"History  of  Modern  Banks  of  Issuo":  Charles  A.  Conar 
'Can  be  obtained  from  Kind's  Printer,  Ottawa. 


BIBLIOGRAPHY 


597 


"Principles  of  Money  and  Banking" :  Charles  A.  Conant. 
••KItimiits  of  Banking":  Henry  Dunning  MacLeod. 
"Uiiiiking"   (2  volumes)  :  Henry  Dunning  MacLeod. 
"Loiiilfiinl  Street" :  Walter  Bagehot. 

"'I'liirtv  Years  of  American  Finance":  Alexander  Dana  Noyei. 
".Moni'tury  and  Banking  Systems" :  Maurice  L.  Muhleman. 
'i'litiils  (ind  Their  Uses":  Frederick  A.  Cleveland,  Ph.D. 
"Kinuncial  Crises  and  Periods  of  Industrial  and  Commercial 
Depression":  Theodore  E.  Burton. 
"Canadian  Banking  System"  (1817-1890):  R.  M.  Brecken- 

"TIk'  History  of  Banking  in  Canada":  R.  M.  Breckenridge. 
"Till'  Canadian  Banking  System":  Joseph  French  Johnson. 
"A  Rational   Banking  System":  H.   M.   P.    Eckart. 
"rrescnt-day  Banking":  Francis  E.  Steel. 

FOREIGN  EXCHANGE 


"A.  B.  C.  of  the  Foreign  Exchanges" :  Geo.  Clare. 
"Money  Market  Primer":  Geo.  Clare. 
"Foreign  Exchange  Text  Book":  H.  K.  Brooks. 
"Foreign  Exchange  Tahles":  H.  K.  Brooks. 
"Sterling  Exchange  Tahles":  E.  Buchan. 
"International  Exchange":  A.  W.  Margraff. 
"Tate's  Modern  Cambist":  H.  T.  Easton. 
"Foreign  Exchange":  Hon.  Yiscount  Goschen. 
"Klcments  of  Foreign  Exchange":  Franklin  Escher. 
"Arbitrage":  11.  Deutsche. 
"Arbitrage":  E.  Kaufmann  (French). 
"Arbitrage  and  Parites":  O.  Haupl  (French). 


QUIZ   QUKSTIONS 


I'ART    I:    HANKINC;    PRINCIPLES 


CHAPTER    I 

1.  Into  what  periotls  may  the  history  of  banking  in 
Canada  be  divided?  Upon  what  fact  should  we  lay  par- 
ticular stress  in  studying  Canada's  banking  histo  ,  ? 

2.  \Vhat  kind  of  money  did  Canada  have  during  the 
New  France  period  ?  How  were  the  "ordonnances"  and 
card  money  redeemed? 

3.  What  were  the  first  steps  taken  by  the  British 
Government  to  place  the  finances  of  the  colony  on  a 
stable  foundation? 

4.  What  was  the  attitude  toward  Army  Bills  when 
they  were  first  issued  { 

').  Discuss  the  progress  of  Canadian  banking  during 
tlu-  ])eriod  from  1817-1867.  Why  was  there  little  uni- 
formity in  the  charters  of  the  banks  established  in  Up^jer 
and  Lower  Canada  during  the  period?  What  part  did 
the  Colonial  Office  play  in  this  perio<l  of  Canada's 
hulking? 

t».  How  was  the  banking  system  changed  by  the 
British  North  America  Act  of  1867? 

7.  What  is  the  duration  of  a  bank's  charter?  Why 
is  this  desirable?  According  to  Sir  Edmund  ¥/aikcr 
MJiat  should  a  banking  system  do  to  meet  the  require- 
ments of  a  rapidly  growing  country? 

599 


^^^  QUIZ    QUESTIONS 

CHAPTER    II 

8.  May  any  insiuuiion  other  than  a  chartered 
use  the  word  "bank"?  From  the  definitions  of  a  "I 
quoted  in  the  text  compose  a  brief  yet  complete  d 
tion  of  a  bank.  What  feature  of  the  Canadian  Bar 
System  cables  the  banks  to  jierform  their  functio 
efficiently? 

9.  What  provisions  are  there  for  savings  deposi 
Canada  ?  ^ 

10.  Is  there  any  danger  in  the  tendency  of  the 
and  loan  companies  to  solicit  demand  deposits?    ] 
do  these  companies  perform  a  valuable  service  foi 
country? 

CHAPTER   III 

11.  Name  the  nine  leading  features  of  the  Bank 
of  1913. 

12.  What  were  the  principal  changes  and  addil 
made  m  the  Bank  Act  ? 

13.  Give  the  arguments  for  and  against  an  audi 
the  banks  by  the  government.  By  the  Canadian  Bi 
ers  Association.    What  system  is  in  force  at  presen 

U.  To  what  extent  is  a  knowledge  of  the  Act  ne 
sary  in  a  study  of  Canadian  banking? 

15.  How  may  the  Act  be  cited? 

1«.  To  what  banks  does  the  Act  apply?  For  1 
long  does  it  extend  their  charters? 

17.  State  the  procedure  in  incorporating  a  new  ha 

18.  How  is  the  new  bank  organized?  Upon  w 
questions  must  the  Treasury  Board  be  satisfied  bef 
It  will  issue  a  certificate  permitting  a  bank  to  comme 
business? 

19.  What  is  the  result  if  the  certificate  is  refused! 


QUIZ    QUESTIONS 


GOl 


20.  To  what  extent  do  the  shareholders  make  the 
hy-Iawsi' 

21.  Name  a  bank  director's  quahfications. 

22.  What  are  the  bank  director's  powers? 

'2'.i.  What  are  the  regulations  as  to  shares  and  share- 
lioldcrsi' 

•2i.  Under  what  conditions  may  the  capital  stock  of 
a  bank  be  increased  or  decreased? 

AVhat  are  the  provisions  as  to  shares  and  calls? 
How  are  transfers  of  shares  provided  for? 


2.5. 
2(1. 


27.  What  information  must  be  contained  in  the  an- 
nual and  special  statements? 

28.  Discuss  the  shareholders'  audit.  What  are  the 
auditor's  rights?  What  information  should  be  contained 
in  Ills  report? 

2!).  .May  the  Minister  of  Finance   request  such  a 

report? 

3»  Is  there  a  limit  to  the  frequency  and  amount  of 
the  dividend  payments? 

31.  How  is  the  cash  reserve  held? 

32.  To  what  extent  may  a  bank  issue  notes? 

33.  State  the  conditions  of  the  additional  issue. 

34.  AVhat  is  the  central  gold  reserve  issue? 

3.).  What  is  the  provision  for  note  issue  in  British 
Colonies? 
3(i.  May  a  bank  pledge  its  notes? 

37.  How  are  the  notes  of  a  bank  which  has  suspended 
jjayinent  redeemed  ? 

38.  Are  banks  obliged  to  keep  their  notes  circulating 

at  par? 

3!>.  If  so  reqin*red  must  a  bank  make  payment  in  Do- 
minion notes?    To  what  extent? 

40.  What  regulations  govern  the  signing  of  bills? 

41.  How  are  fraudident  notes  treated? 


G0!2 


QUIZ    QUESTIONS 


CHAPTER   IV 

42.  What  are  the  powers  and  limitations  of  a 
dian  bank? 

43.  What  are  the  provisions  of  Section  88  of  the 

44.  State  the  stipulations  applying  to  rates  of  in 
and  exchange. 

45.  What  are  the  regulations  governing  deposil 

46.  What  is  the  procedure  when  there  is  an  an 
mation  of  banks? 

47.  What  information  must  a  bank  submit  t 
M mister  of  Finance  each  year? 

48.  How  are  the  unclaimed  funds  of  a  bank  \ 
care  of  after  dissolution? 

49.  Describe  the  procedure  when  a  bank  susi 
payment.  * 

50    If  the  assets  of  a  bank  are  insufficient  to  pa 
liabilities  how  is  the  difference  made  up? 

51.  Under  what  conditions  is  a  bank  declarec 
solvent? 

52.  What  are  the  principal  penalties  which  ma 
incurred  by  the  public  under  the  Act?  By  the  ban) 
their  officers? 

53.  What  are  the  principal  changes  and  additior 
the  headings  of  the  monthly  and  annual  staten:ents  n 
by  the  Act? 

CHAPTER   V 

54  Describe  the  various  forms  of  currency  usee 
Canada.  What  curency  is  legal  tender?  What  i 
visions  are  made  for  the  redemption  of  Dominion  no 

55.  Where  may  Dominion  notes  be  redeemed  ?  W 
was  the  amount  of  these  outstanding  June  80,  19 
^^  hat  amount  was  in  the  hands  of  the  public? 


QUIZ    QUESTIONS 


603 


.50.  From  the  banker's  standpoint  what  is  the  valu- 
able feature  of  permitting  bank  note  issues? 

57.  How  is  the  holder  of  bank  notes  secured?  Why 
is  it  |)r()per  that  note  holders  should  have  prior  rights 
oil  the  bank's  assets  as  against  the  depositor? 

.)8.  \Miat  is  meant  by  elasticity  in  currency?  How 
does  the  Canadian  sysvem  of  note  issue  provide  for  this? 

.50.  In  what  months  is  the  circulation  of  notes  heaviest? 

OO.  What  expedients  have  been  tried  to  keep  the 
amount  of  notes  in  circulation  equal  to  the  demand? 

(51.  Which  are  the  months  of  note  issue?  Of  note 
redemption?    What  are  the  reasc;ii>  for  this  grouping? 

62.  Explain  the  provision  for  emergency  currency. 
What  restricts  its  issue?  To  what  extent  have  the  banks 
used  this  privilege? 

63.  How  do  the  central  gold  reserves  provide  for 
additional  note  issue? 

64..  To  what  extent  are  notes  lost  or  destroyed? 

()5.  Under  the  "branch  bank  system  money  always 
finds  its  own  level."  Explain.  Why  does  this  system 
work  particularly  well  in  Canada? 

()6.  Discuss  the  two  principal  factors  which  have  en- 
abled the  banks  to  assist  materially  in  the  expansion  and 
upbuilding  of  Canada.  Compare  the  various  nations  as 
to  the  number  of  banks  per  thousand  population. 

67.  Explain  how  the  branch  system  helps  to  avert 
panics  and  prevent  bank  failures. 

(>8.  How  are  the  banks  continually  lending  to  Peter  to 
pay  Paul?    Discuss  the  various  aspects  of  this  stiuation. 

69.  Compare  the  methods  of  which  the  Canadian  busi- 
ness man  can  avail  himself  in  borrowing  money  with 
those  which  the  American  business  man  uses. 

70.  What  features  of  the  Canadian  banking  system 
have  enabled  it  to  perform  its  functions  so  successfully? 


604 


I 


QUIZ    QUESTIONS 


I 


CHAPTER   VI 

balk  n)?*^'''/'''.'""'^^'"''^  "'""*''^>'  statements  of 
bank  of  particular  interest?  What  is  a  bank  staten 
intended  to  show  primarily? 

72.  \\1,y  is  it  risky  for  both  the  bank  and  the  pu 
to  allow  savmgsd^^^^^^     to  be  used  as  cheekin/a     Z 

73    Why  ,s  ,t  unprofitable  to  allow  interes    on 

75.  Why  is  it  unnecessary  for  a  bank  to  maint 
large  balances  with  other  banks? 

76.  What  is  included  under  the  heading  "due  to  bar 
in  foreign  countries"?  ^ 

77.  How  does  the  heading  "due  to  Dominion  a 
Provmcial  governments"  arise? 

a.  to  th':  ;:;;b;^r^  ^'"-^^"^^^  «^  p^"«*«'^^^  ^^ «.  ban 

centage  to  paid-up  capital  a  misleading  one ? 

«0.  How  IS  the  cash  reserve  regulated? 

HI.  How  do  the  banks  make  a  steady  loan  to  tl 
J)ublic  without  interest?  * 

82.  ^Vhat  form  of  assets  do  the  deposits  with  othc 
banks  represent? 

83.  Are  securities  listed  among  the  quick  assets? 

loans' in  thfT"''  "'"  ''"  ^"'"^  '"  ^^^^^^^  ""*  ^^^ 
loans  in  the  strict  acceptance  of  the  word? 

Jd  tirjr'r""  ^?T  ^'""^'^^^^  *^'«"  •"  Canada  . 
^ood  thing  for  Canada?    On  June  30,  IO13,  what  wa- 

the  net  amount  of  (^ana<h•an  money  thus  loan;i?    Is'he 


QI'IZ    QUESTIONS 


605 


call  loan  rate  in  New  York  as  high  as  in  Canada?  Why 
do  the  Canadian  banks  loan  call  money  in  New  York? 
FAainine  Sir  Edmund  Walker's  statement  on  call  loans 
as  a  form  of  reserve. 

Hi).  In  what  way  is  a  legal  reserve  useless?  How  will 
the  central  gold  reserve  affect  the  standard  of  comput- 
ing' the  strength  of  a  hank  in  point  of  reserves? 

«7.  Make  a  broad  division  of  current  loans.  Discuss 
the  comparative  value  of  these  two  divisions.  How  does 
a  hanker  become  a  partner  in  a  concern  to  which  he  loans 
money? 

88.  Is  the  business  man's  credit  as  seriously  affected 
by  allowing  his  notes  to  become  overdue  as  the  farmer? 

89.  To  what  extent  may  a  bank  own. real  estate? 

00.  Give  three  reasons  why  a  bank  should  build  a 
substantial  office.  How  should  the  bank  premises  ac- 
count be  treated? 

91.  Have  bank  profits  increased  in  recent  years  con- 
sidering the  capital  invested  and  the  business  transacted? 
Analyze  a  bank's  profit  and  loss  statement. 

92.  Show  why,  from  the  profit  and  loss  statements 
given  in  the  text,  it  would  be  unprofitable  to  increase 
the  rate  on  savings  deposits  to  3i  per  cent. 

9;j.  How  is  the  net  i)rofit  found  ?   How  is  this  divided  ? 

94.  Why  must  a  large  i)ercentage  of  the  value  of 
hank  premises  be  written  off? 

95.  How  has  the  attitude  towards  the  reserve  changed 
from  its  original  purpose? 

06.  How  may  a     ink's  gross  profits  be  determined? 


600 


VLIZ    gi'KSTIONH 


I'AHT    U:   JJANKING   PRACTICE 

CIIAPTEH    I 

07.  What  are  the  principal  (h.ties  c.f  a  har.k  dire. 

I)- t^c^oard  of  Directors  of  a  hank  acUllv 
.»H.  Kn.nnerate  the  n.enihers  of  a  head  offiee    ' 

brancte;  *'  '"  ''"'''"'''•^  '"»"»  ■""'le  at 

I(H..  Discuss  the  chief  i„sp«.tor  an.l  hi,,  „.ork. 

CPIAPTER   II 

a.  the  helTofflrr""^  ""  ''^'■'  '"  "'^  «™-'"  'e<l«. 
heaT.-^::  ';\^,:r"™"™'»'  «—"*.  kept  a*  th 

offleet  "'•""  ^""'"*'™'  "'■^""'"^  -  "ei't  at  the  hea, 

Whv  I.    f  '  ""'  """^  '■"  "•«  »t'«^k  departmenti 

V^hy  IS  It  necessary  to  rcsrister  «t«^i,  t      '^J'a"ment, 

..ea.  Officer    VVhere'are  ^^Z^:^^^^  *'  ''' 


QUIZ    QUESTIONS 


607 


100.  Who  keeps  the  circulation  records  of  the  bank? 
Hon  are  soiled  and  mutilated  notes  retired  ? 

110.  How  do  the  branches  make  returns  to  the  head 

officr? 

111.  \Vho  makes  up  the  branch  clearing  statement? 
Ilow  often  is  it  sent  to  the  head  office? 

11 -J.  What  information  is  contained  in  the  financial 
statement?    How  frequently  is  it  forwarded  to  the  head 

office  ? 

113.  From  what  book  is  the  discount  report  drawn? 

114.  What  is  the  cash  item  account? 

11.5.  How  often  is  the  balance  sheet  sent  to  the  head 
office?    What  information  does  it  contain? 
no.  What  conies  under  the  head  of  overdue  bills? 

117.  What  is  the  monthly  liability  return? 

118.  In  addition  to  the  above  what  other  returns  do 
the  branches  make  to  the  head  ofifice? 

119.  Through  what  two  channels  does  the  general 
manager  get  complete  information  about  the  branches? 
Summarize  the  data  contained  in  each.  What  is  the 
practical  result  of  this  information? 

120.  How  is  the  routine  work  reported  to  the  head 
office? 

CHAPTER   III 

121.  What  are  the  principal  duties  of  the  branch 

manager? 

122.  Describe  the  daily  routine  of  the  branch. 

123.  To  what  ofl^cer  in  a  national  bank  of  the  United 
States  may  the  accountant  be  compared?  Enumerate 
Ills  duties. 

124.  What  are  the  teller's  duties? 

125.  The  ledger-keeper's  duties? 

126.  Why  is  the  collection  clerk's  position  important? 


(>()K 


griz  QiKSTioNS 


I  low  (Iocs  this  (Icpartiuent  record  the  receipt  of  lei 
notes,  (h'afts,  etc.? 

1'27.  ^VlIat  is  the  work  of  the  discount  clerk? 

128.  What  are  the  junior's  duties?  Upon  what 
his  promotion  depend? 


CIIArTKR    IV 

129.  Why  is  the  cash  book  the  principal  book  in 
accounting?    As  the  bank  grows  what  books  are  ad 

130.  Name  the  books  in  use  at  a  fairly  large  brj 
In  introducing  new  books  what  principles  shoul 
observed  ? 

131.  W^hat  is  the  legal  value  of  accounts  kept  in  I 
leaf  form  ?  What  rules  are  observed  in  the  use  of  I 
leaf  books? 

132.  To  what  extent  should  the  use  of  the  ad 
machine  be  restricted? 

183.  How  is  the  accuracy  of  the  figures  in  the 
book  insured? 

134.  How  is  the  cash  book  written  uj)? 

133.  W^hat  is  the  Sherbrooke  cash  book? 

136.  What  figures  are  entered  in  the  supplemer 
cash  book? 

137.  Of  what  classes  do  lo.xns  principally  consist' 
what  book  are  they  entered? 

138.  AVhat  is  tlie  discoimt  blotter? 
ISO.  The  discount  diary? 

140.  The  trade  bills  remitted  diary? 

141.  How  are  drafts  drawn  on  foreign  correspon( 
covered?  How  are  remittances  for  collections  ma( 
other  banks?    What  is  the  drafts  register? 

142.  On  what  forms  are  debits  between  brai 
listed? 


QT'IZ    QI'ESTIONS 


60» 


t  of  letters, 

rk? 

I  what  does 


tok  ill  bank 

are  added? 

•ge  branch. 

should  be 

pt  in  loose- 
se  of  loose- 

the  adding 

in  the  cash 


plementary 
:onsist?   In 


•espondents 
ns  made  to 


143.  What  is  the  "cash  items"  account? 

]U.  How  are  entries  made  in  the  remittance  book? 

U.>.  \\'hy  is  the  branch  clearing  statement  necessary? 

UC.  What  are  "at  credit  advices"? 

U7.  Head  office  entries? 

148.  Why  are  all  correspondents'  accounts  not  kept 
at  a  l)raiich  ? 

149.  Enumerate  and  explain  the  teller's  records. 

1.50.  Of  what  importance  is  the  general  ledger? 
What  accounts  are  kept  in  it? 

1.51.  What   are   the   advantages  of  the  cash   book 

ledger? 

1.52.  What  is  the  current  deposit  ledger?  How  are 
the  petty  accounts  in  this  ledger  disposed  of? 

1.5.3.  How  is  the  savings  bank  ledger  kept?  When 
there  are  several  such  ledgers  how  are  they  balanced? 

1.54.  To  what  other  book  does  the  liability  ledger 
correspond?  What  information  is  recorded  in  the  lia- 
bility ledger?    What  are  "Blue  Books"? 

1.5.5.  Describe  the  collection  register.  How  are  entries 
made  in  it? 

1.50.  AVhat  is  the  purpose  of  the  collateral  register? 
1.57.  How  does  the  branch  keep  track  of  letters  re- 
ceived?   Of  letters  sent? 
158.  What  is  the  general  statement  book? 
1.59.  How  are  past  due  bills  recorded? 
IfiO.  AVhat  is  the  purpose  of  the  produce  book? 
Ifil.  The  balance  book? 
Ifi2.  Overdraft  register? 

Ifi3.  How  are  errors  in  the  accounts  corrected? 
164.  What  is  the  proforma  stationery  book? 
lfi.5.  How  is  the  treasury  cash  accoimt  kept? 

Are  special  registers  often  necessary?    Under 
ircumstances? 


what 


C-VIII— 89 


lilO 


QLIZ    QUESTIONS 


CHAPTER   V 

167.  Who  approves  the  opening  of  a  new  acco 

168.  What  precautions  are  taken  upon  oneni 
account  ? 

169.  What  particulars  are  recorded  in  the  ledirei 
the  opening  of  a  new  account  ? 

170.  A\'hat  s]i€vial  provisions  are  made  in  the  c 
professional  partnerships?    Why? 

171.  Joint  stock  companies? 

172.  Joint  accounts?    What  is  a  joint  account 

173.  Enumerate  the  special  regulations  govern 
married  woman's  account. 

174.  What  is  the  procedure  in  the  case  of  a  di 
orcd  bill,  acceptance,  and  the  like? 

175.  Who  is  authorized  to  make  entries  in  the  le. 
i-rom  what  sources  are  entries  made? 

176.  Describe  the  procedure  when  a  deposit  is  r 

177.  How  IS  money  received  after  hours  taken  car 
1/8.  In   what  books  does   the  teller  make  enl 

liow  are  the  customers'  pass  books  balanced? 
179.  How  are  customers'  accounts  certified? 

frau'd?  '^^  ''*''*  ''^*'"*  ''"  '^'  ^'""^  ^"^  ««' 

181.  Discuss  the  certification  of  checks. 

182.  What  precaution  should  be  taken  before  c 
Jngacheck? 

183.  How  are  checks  and  deposit  slips  filed?    W 

184.  What  rules  apply  to  the  current  account  led. 
18o.  I  nder  what  circumstances  are  duplicate  i 

books  issued  ? 

186.  How  is  interest  on  savings  accounts  compul 


QriZ    QUESTIONS 


611 


CHAPTER   VI 

187.  \Miat  facts  slumld  a  manager  know  to  determine 
Hlittlitr  or  not  he  should  extend  credit?  What  ques- 
tions should  he  ask  himself  about  each  loan?  Give  a 
simple  rule  to  folloAv. 

IHH.  \Vhat  are  the  principal  causes  of  failure  accord- 
ing t(.  Bradstrcet?  What  is  the  most  important  cause? 
Discuss  the  relative  importance  of  these  causes. 

189.  Why  has  the  practice  of  requiring  statements 
fron.  borrowing  cu.stomers  grown?  Discuss  James  G. 
Cannon's  opinion  of  credit. 

190.  Analyze  the  principles  and  rules  which  govern 
the  bank  credit  man. 

191.  What  are  quick  assets?    Current  liabilities? 

192.  What  may  a  large  amount  of  cash  on  hand 

indicate? 

193.  Indicate  the  precautions  necessary  in  estimating 
the  value  of  merchandise  and  raw  materials. 

194.  How  would  you  analyze  the  bills  and  accounts 

receivable  ? 

10.5.  What  are  fixed  assets?  How  may  rent  be  used 
as  a  means  of  determining  business  ability?  What 
should  be  taken  into  account  in  estimating  the  value  of 
rml  estate  as  security? 

196.  To  what  extent  may  current  liabilities  indicate 
n  man's  worth  as  a  credit  risk?  What  precaution  should 
■i  l»ank  take  in  case  of  liabilities  to  relatives,  firm  mem- 
bers or  employes? 

197.  What  other  factors  m  addition  to  those  men- 
tioned should  be  considered  in  determining  the  desira- 
niiity  of  making  a  loan? 


613 


V  IZ    gilKSTlONS 


108.  U'hat  «ei.er«|  (,„e«ti«n.s  noul.I  v«u  ask 
in  deciding  upon  a  Umni 

1  no    Why  slHH.Id  unnecessary  risks.  „„  „,atl 
sma  I.  be  avoided?    How  mav  a  manage    klen 
::;tr'"'   t..  infor„.tion*he  need^'a^o^h 

200.  What   points  should   the  nianairer  ob« 
writing  the  letter  of  application  ?  ^ 

CIIAPTKK   VII 

201    Describe  the  procedure   in  making  call 

t  WhT  ^t  -^'""^^  ''^  «»^P'-^  *«^»^e  sec 
-0..  What  IS  the  attitude  towards  loans  to  t 

sional  or  salaried  men?    Why?  ^ 

203.  Discuss  loans  to  farmers.     V\^hat  feature  , 

^:mllvr    "^^^^    *'-^    ^"-    -e    desl^^ 

desirable?'"   ^^''^*  ""^"*'""^  «-  ^"^  *«  -I 

205.  Discuss  the  desirability  and  necessity  nf  m, 
loans  to  manufacturers  and  wholesale  m"!^^^  " 
conditions  should  govern  loans  to  whoJlej  ^ch 

against  notes  as  collateral  rather  than  to  discount  t 
^^  hat  precautions  should  be  obsened ? 

about  overdrafts?  '  '^"P"""""  <^™'-' 

sp^Mo^rj?"."'''  ""  """""«"  »f"W^  himself  in 

spect  to  doubtful  paper?    Con«;r]*»r  fk^ 

of  this  paper.  Consider  the  various  cla 


QITIZ   QUESTIONS 


613 


CHAPTER    VIII 

•JK).  Distinguish  between  tlie  security  afforded  under 
Stcfioris  m  and  88  of  the  Bank  Act. 
211.  Disniss  Section  88  in  detail. 
•-'I  J.  To  wliat  extent  is  "the  promise"  security? 
•2V.I  What  is  an  assignment  ?   How  shouhl  it  be  made 

L'U.  What  is  a  declaration?    Why  is  it  important? 

•Jl.).  Describe  the  form  of  note  used  in  loans  made 
under  Sections  86-88-90. 

I'K).  \Vhat  (juestions  should  the  manager  be  able  to 
answer  l)efore  making  advances? 

iil7.  ^^'hat  conditions  govern  loans  made  on  ware- 
lioiisc  receipts? 

I'lH.  Discuss  the  practice  of  substitution  in  this  con- 
nection. 

-Ml).  How  are  "current  seasons"  determined? 

•Ji'O.  How  does  the  bank  gets  its  money  if  a  loan  made 
under  Sections  8G-90  is  unpaid? 

'2'2^.  Why  are  losses  frequent  in  loans  of  this  char- 
acter? What  is  the  most  important  thing  to  remember 
in  making  such  loans? 

2J2.  Under  the  interpretation  of  the  Act  define  "bill 
of  lading,"  "farmer,"  "goods,  wares,  and  merchandise," 
"Krain,"  "manufacturer,"  "products  of  agriculture," 
"warehouse  receipt." 


CHAPTER    IX 

223.  Why  is  an  accurate  cost  system  necessary  in  a 

l)ank? 

224..  W^hat  poiht  should  be  kept  in  mind  when  deter- 
mining the  profit  or  loss  involved  in  a  deposit  account? 


014 


QUIZ  gi  r.sTioNS 


225.  Divide  small  checking  accounts  into  eight  cIj 
Discuss  them  from  the  banker's  viewpoint.  Woi 
he  profitable  for  the  average  bank  to  pay  more  \\ 
per  cent  interest  on  savings  deposits?    Explain. 

226.  What  is  a  simple  way  of  keeping  tab  on  th 
penses  of  a  bank?  How  many  men  are  requirec 
million  dollars  of  deposits  in  Canada?  In  the  U 
Explain  the  difference. 

227.  About  how  much  interest  is  lost  annual 
Canada  on  outstanding  items  held  over  night  fo 
daily  local  clearings?  What  elements  of  expense  si 
be  considered  in  making  an  exchange  charge  to  a 
tomer?  Explain.  Work  out  the  cost  of  handli 
hundred  dollar  check  between  Toronto  and  Montr 

228.  How  is  the  loanable  value  of  an  account  c 
mined  ?  What  charges  should  be  included  in  arrivi 
the  cost  per  item? 

229.  Analyze  an  account  so  as  to  show  its  gross 
ings  and  the  expense  of  keeping  it. 

230.  Upon  what  does  the  amount  earned  on  a 
count  principally  depend?  Do  debit  balances  entei 
the  value  of  a  deposit  account?    Why? 

231.  How  is  the  net  profit  or  loss  on  an  excJ 
figured?  How  can  the  data  be  conveniently  arra 
so  as  to  determine  the  profit  or  loss? 

232.  What  is  meant  by  a  check  paid  at  par? 

233.  What  changes  might  be  suggested  if  on  ani 
an  account  proves  unprofitable? 


CHAPTER   X 

234.  How  often  and  when  is  a  branch  inspected 
what  does  an  inspection  consist?    Explain. 

235.  What  is  the  first  step  of  the  audit  officer  in 
mencing  an  audit? 


QUIZ   QUESTIONS 


615 


230.  How  are  the  securities  and  cash  checked? 

237.  How  are  the  ledgers  checked?  What  are  the 
steps;  •  Hiis  procedure? 

23=     -low  are  the  sundries  checked? 

231  V^hat  does  the  inspection  liability  return  show? 
Accordif  g  to  what  ratings  does  the  inspector  value  all 
the  uceoiints? 

240.  Discuss  the  rules  and  regulations  of  a  branch. 

241.  What  are  staff  reports? 


icer  m  com- 


CHAPTER   XI 

242.  Are  efficiency  methods  applicable  to  bank  work? 
What  important  efficiency  methods  are  now  being  used 
in  banks?  Where  do  you  think  efficiency  methods  may 
he  profitably  employed  in  a  bank? 

243.  What  is  the  batch  method?  How  does  it  work 
nut  in  practice?    What  are  its  advantages? 

244.  How  are  large  numbers  of  checks  handled  when 
received  in  one  deposit? 

245.  Explain  the  numerical  transit  system  in  the  U.  S. 
240.  What  method  has  been  suggested  for  Canada? 

247.  Describe  the  monthly  statement  system.  What 
is  the  method  of  its  operation? 

CHAPTER   XII 

248.  How  should  collections  be  handled? 

249.  Can  mercantile  reports  be  relied  on  entirely? 
How  may  they  be  supplemented? 

2J0.  How  can  the  expense  account  be  kept  down? 

251.  What  points  in  an  insurance  policy  should  l)e 
considered  when  it  is  assigned  to  a  bank  to  cover  direct 
advances?    Explain  the  80  per  cent  co-insurance  clause. 

252.  How  are  telegrams  transmitted? 


616 


QUIZ    QUESTIONS 


253.  How  are  clearing  settlements  made?  \\ 
items  are  cleared  in  a  Canadian  Clearing  House? 

254.  >Vhy  are  guarantee  bonds  a  dangerous  forn 
security  ? 

255.  What  precautions  should  be  taken  in  regan 
a  power  of  attorney?  How  may  a  power  of  attor 
be  terminated  ? 

256.  What  regulations  govern  the  despatch  and 
ceipt  of  money  parcels  in  Canadian  banks? 

257.  What  rules  govern  the  custody  of  the  bai 
securities  in  the  vaults  and  safes? 

258.  How  are  lost  checks  and  drafts  recorded? 

259.  What  interest  has  the  bank  in  a  depositor's  m 

260.  Why  should  strict  secrecy  be  observed  in  c 
nection  with  all  transactions  between  a  bank  and 
customers  ? 

261.  How  may  a  young  man  prepare  himself  to 
a  banker? 


PART  III:    FOREIGX    EXCHANGE 


CHAPTER    I 


269.  Define  exchange.  Distinguish  between  fore 
and  inland  exchange.  Which  is  more  complicat 
^^'hy  are  the  charges  for  inland  exchange  particula 
low  in  Canada? 

270.  Discuss  inland  exchange  in  the  United  Stal 

271.  lentil  1912  New  York  funds  were  generally 
a  discount  despite  the  fact  that  the  "balance  of  tra( 
was  adverse  to  Canadp.  Why?  Why  has  Canada  pra( 
cally  no  exchange  market  of  its  own? 


QUIZ   Ql'ESTIONS 


617 


J?     What 

)use? 

IS  form  of 

regard  to 
f  attorney 

;h  and  re- 

:he  bank's 

led? 

iter's  will? 
id  in  con- 
Is  and  its 

self  to  be 


GE 


n  foreign 
iplicated? 
Tticularly 

'd  States, 
lerally  at 
of  trade" 
ia  practi- 


27'i.  How  does  the  necessity  for  foreign  exchange 
arise  ( 

273.  What  is  mint  par? 

274.  What  are  gold  points? 

27.3.  Of  what  importance  is  the  fixed  par  of  exchange? 

270.  A  cotton  merchant  in  the  United  States  has 
sold  100  hales  of  cotton  to  a  spinner  in  liiverpool.  Kng. 
Explain  how  the  payment  is  effected. 

277.  What  is  the  difference  between  "discountable" 
and  "rebatable"  commercial  long  bills? 

278.  In  a  general  way,  which  is  the  safer,  a  commer- 
cial bill  drawn  against  cotton,  or  a  commercial  bill  drawn 
against  meat?    Why? 

271).  Why  are  "clean"  bills  a  risky  kind  of  exchange 
ill  which  to  deal? 

280.  Assimie  that  bonds  have  been  sold  by  a  banker 
in  Xew  York  to  a  banker  in  liOndon.  lixplain  how 
they  will  be  paid  for. 

281.  What  are  the  three  main  classes  of  "bankers'  long 
l)ills"? 

282.  W^hy  do  international  loaning  operations  bring 
\un^  bills  of  exchange  into  existence? 

283.  How  do  "finance  bills"  differ  from  bills  orig- 
inating as  a  result  of  foreign  loaning  operations? 

284.  What  are  the  main  limitations  to  the  issuing  of 
tinance  bills? 


CHAPTER    II 

285.  Explain  the  operation  of  a  banker's  selling  de- 
mand exchange  against  a  remittance  of  demand  ex- 
change. 

280.  Does  the  credit  of  the  drawer  of  a  commercial  bill 


f^lS 


QlIZ    ylKSTIONS 


have  much  of  an  effect  on  the  rate  of  exchange  at  \ 
it  can  he  sold^ 

•J87.  Why  most  hankers  who  make  a  practice  of 
ing  "cahles"  keep  good  balances  abroad. 

288.  What  fixes  the  difference  in  the  rate  of  excli 
between  "cables"  and  "demand." 

289-290.  Explain  the  operation  of  a  banker's  st 
demand  bills  against  remittances  of  long  bills.  \ 
long  bills  are  remitted,  when  does  the  balance  al 
become  available  ? 

291.  Whv  are  different  bills  of  the  same  kind 
counted  abroad  at  varying  rates? 

292-93.  Explain  how  foreign  money  is  loaned  i 
American  market. 

294.  How  is  it  that  foreign  money  can  be  loane 
here  without  any  actual  cash  being  sent  over? 

29.>.  \>'hat  is  meant  by  the  "risk  of  exchange"  or 
eign  loans? 

29().  Show  why  profits  made  out  of  this  kind  of 
ness  are  large. 

297.  What  is  meant  by  investing  money  in  excht 

298.  Show  the  principal  Ijenefit  of  investing  ii 
in  exchange. 

299.  In  the  above  operation,  long  bills  remitted  al 
are  not  discounted.    Why  not? 

300.  WHiat  is  the  reason  for  "arbitraging"  ii 
change? 

301.  W^ithout  giving  exact  figures,  explain  an 
trage  operation  in  foreign  exchange. 

302.  Why  is  great  skill  required  for  operatic 
this  kind? 


Ql'IZ    ylESTIONS 


(ilU 


CIIAPTEU    HI 
303.  U'hy  is  commercial  credit  business  growing  in 


;{()4.  What  is  the  primary  purpose  of  a  commercial 

3(1.").  How  does  the  shipper  of  the  merchandise  get  his 
iiiotiry  ? 

30(1.  What  part  does  the  credit  of  the  importer  play? 

307.  Explain  the  general  purpose  of  a  "trust  receipt." 

3()H.  What  is  the  great  advantage  of  a  conmiercial 
mdit  to  at)  importer  of  merchandise? 

3(M>.  AVhat  is  its  advantage  to  the  shipper  of  the 

i>'()(»(ls? 

310.  1(1  a  commercial  credit  transaction  the  banker 
puts  ii))  IK)  actual  money,  and  yet  the  shipper  of  the  mer- 
iliaiulisc  receives  his  money  at  once.    Where  does  it  come 

flOIll? 

311.  What  are  export  credits? 

31'J.  AVhat  influence  does  the  issue  of  commercial  cred- 
its I'xert  on  the  stability  of  the  commercial  structure? 


CHAPTER    IV 

313.  \\\\sl\  are  the  main  divisions  of  dealings  in  ex- 
diaii^e  originating  from  international  security  trading? 

3U.  Explain  how  the  replacing  of  maturing  invest- 
ineiits  held  abroad  gives  rise  to  foreign  exchange  trans- 
actions. 

31.),  Show  the  usual  method  of  financing  international 
siKciiIation  in  securities. 

31(1.  Define  "arbitrage"  as  applied  to  securities. 

317.  Why  is  there  ever  any  difference  in  the  price  of 
til'  same  security  in  two  different  markets? 


6^20 


QUIZ    QUESTIONS 


318.  What  constitutes  u  fair  profit  in  stock  arbi 
In  bond  arbitrage^ 

819.  Why  do  operations  of  this  sort  at  tin 
strongly  influence  the  exchange  market? 

320.  Why  is  the  exchange  market  so  gotul  ai 
cator  of  tlie  trend  of  international  security  dej 


CHAPTER   V 

321.  Why  is  there  a  "i)riniary"  movement  of 

322.  What  is  the  secondary  distribution? 

323.  Why  do  small  exports  result  in  high  ext 
rates? 

324.  Point  out  the  influence  of  low  money  ra 
foreign  exchange. 

325.  How  do  high  money  rates  afi'ect  the  ext 
market  ? 

326.  Show  how  international  buying  and  selling 
ments  of  securities  afl'ect  the  exchange  market. 

327.  What  is  a  "direct"  movement  of  gold? 

328.  An  indirect  movement? 

329.  Why  is  the  business  of  shipping  gold  c 
trated  in  the  hands  of  a  few  bankers? 


CHAPTER   VI 


330.  Why  is  it  desirable  for  an  exporter  of  me 
dise  to  know  something  about  foreign  exchange 

331.  How  may  an  exporter  of  goods  to  (iermai 
his  payment  in  dollars,  instead  of  in  marks? 

332.  How  long  does  it  take  for  the  exporter 
his  money? 


Qi'iz  giiES'noNs 


621 


iVitl  IIoAv  are  banking  commissions  on  foreign  ex- 
t'liaii^fc  transactions  determined? 

:VM.  What  is  the  advantage  of  drawing  a  draft  direct 
oil  the  foreign  purchaser  of  goods? 

;j.'J.).  \N'hy  is  it  becoming  more  common  practice  to 
draw  (h-afts? 

:i'M}.  What  are  "export  letters  of  credit"? 

.'WT.  Wliat  are  the  advantages  of  this  method  of 
paymi'iit  if 

;{.'{«.  Show  by  an  example  how  this  method  works. 

.'WD.  Why  are  payments  for  trade  between  this  coun- 
try and  South  America  bandied  through  London? 

;J4().  Why  do  ninetv-dav  bills  sell  at  a  lower  rate  than 
sijjlit  bills  of  exchange? 

.'141.  Where  is  the  market  for  long-period  bills  of 
exchange? 

CHAPTER   VII 


'.U'l.  Reduce  £1481  to  dollars  when  the  rate  of  ex- 
fliaii^rc  is  $4.8525. 

'M'i.  How  is  a  rate  of  exchange  made  on  ninety  day 
paper' 

.'J44.  How  is  interest  figured  in  foreign  exchange 
transactions? 

.'U.).  Xanie  the  general  regulations  governing  sterling 
(MJian^c.  State  a  simple  rule  for  converting  sterling 
to  dollars  at  par  rate. 

.'U«>.  How  are  the  book  entries  made  for  foreign  ex- 
rlian^e  transactions? 

•'U7.  How  are  demand  drafts  entered? 

•UH.  How  are  bills  of  exchange  purchased  entered  on 
the  books? 


622 


Ql'IZ    gi'ESTIONS 


CHAPTER   VIII 

349.  Discuss  the  currency  of  the  Latin  Union 
tries. 

850.  Find  the  cost  of  a  draft  for  672  francs  at 
I'ents  per  franc. 

351.  How  does  the  franc  quotation  differ  fron 
usual  exchange  quotations? 

852.  How  are  quotations  for  time  bills  draw 
France  derived  ? 

858.  What  is  tlie  cost  in  dollars  for  1,000  marl 
9514? 

354.  What  are  the  regulations  governing  exch 
with  Holland? 

355.  What  is  the  common  unit  in  the  Scandina 
Union?    In  Austria? 

856.  What  are  the  principal  difficulties  of  the 
nese  exchange  situation?     ^Vhat  is  the  mint  par  v 
of  the  yen? 

857.  Give  the  rule  for  converting  dollars  into  fon 
currency  at  the  mint  par  value. 


CHAPTER   IX 


358.  What  is  non-commercial  exchange?    How  d 
it  arise? 

359.  What  are  the  principles  underlying  the  issua 
of  drafts? 

360.  What  is  an  advice?    Why  is  it  used? 

361.  What  precautions  are  taken  to  avoid  difficult} 
establishing  the  bona  fides  of  drafts? 

862.  How  is  the  cost  of  drafts  ascertained? 


QI'IZ    QUESTIONS 


623 


3<5.3.  Distinguish  between  drafts  and  travelers'  checks. 

im.  What  are  the  principal  features  of  travelers' 
tliccks? 

.{*».>.  How  are  travelers'  checks  paid  ? 

;}«»♦».  What  deductions  are  made  if  any? 

'.m.  How  are  travelers'  checks  redeemed? 

IW».  What  is  the  letter  of  indication? 

;IH9.  How  can  the  holder  protect  himself  if  travelers' 
cheeks  are  lost? 

370.  What  is  a  letter  of  credit? 

371.  How  are  payments  made  to  the  holder  of  a  letter 
(if  eredit? 

372.  What  are  circular  notes? 

373.  What  is  a  foreign  money  order? 

374.  How  are  foreign  money  orders  paid? 

375.  What  are  mail  remittances?  Why  are  they  nec- 
essary? 


B  issuance 


INDEX 


Arrf  (»»»ncp  hilla,  434. 
.\rrniiitiin<lMtion  paper.  i76-i78. 
Arrniiiitant,  the,  in  branch  office,  139- 

Ul. 
Arroiinting  in  banks,  U7. 
Accounts, 
Analysis   of   cost  of   active.  331- 

XUi. 
Ortifh-ation  of,  -219. 
Joint.  Jm. 

Joint,  form  for,  212. 
Nrw,  how  safeguarded,  204. 
Of  rorrespondcnts,  S22. 
Of  small  depositors,  318-a}2. 
Recrival»le,  2iS. 
Two,  for  advance  loans,  300. 
With  married  women,  2m. 
Adding  machines,  the  use  of,  I  ji. 
Advance  money  on  exchange,  511. 
Advances, 
Facts  needed  to  determine,  29«, 
On  warehouse  receipts  and  assign- 
ments. 383-313. 
Advice.  letter  ot,  how  drawn,  441. 
Advised  letters  of  credit,  447. 
Agreement,  substitution,  307. 
Apiculture,    products    of,    defined, 

Amrriran 

Bankers'  .Association,  rules  issued 
»)y.  :W9. 

Quotations   converted    into    Cana- 
dian. 387-592. 
Analysis 
Of  a  bank  statement.  80-111. 
Of  active  account  cost,  331-336. 
Of  net  proflts,  103. 
Siieet.  334. 


Application 

For  circular  letter  of  credit,  162. 
For  commercial  credit,  Ml. 
For  a  loan,  2M). 
Of  the  Bank  Act,  18. 
Arbitrage  proflts,  488. 
Arhitraging  in  exchange,  458. 

International,  ^m. 
Army  bills  of  I8U»,  3. 
Assets 
And  resources  compared,  94-9«. 
Purchase  of,  38. 
Asiatic  exchange,  534. 
Assignments,  current  season  in,  308. 

Of  goods,  2»7'392. 
Assignment,  note  for,  ->96. 
At  credit  advices,  174-175. 
Attorney,  powers  ot,  207,  391-394. 
Audit,  the,  346. 
Auditors,  duties  of,  26. 

Austrla-Hungary,Canadlan  exchange 
with,  iM. 

Averages  and  percentages,  statement 
of,  125. 

B 

Bailee  receipts,  478-479. 
Balance 
Book,  198. 

Sheet,  in  head  office,  131-132 
Bank 
Accounting,  147. 
Assets,  purchase  of,  38. 
Cost  accounting,  314-344. 
Credits,  Cannon  on,  234-236. 
Department  in  a,  360. 
Dissolution  of  a,  39. 
Expenses  in  a,  383. 
Head  office  ot  a,  113-121. 


685 


MICROCOPY   ttfcSOlUTION   TEST   CHART 

(ANSI  ond  ISO  TEST  CHART  No    2) 


1.0 


I.I 


1.25 


^   1^    IIII2.0 


1.4 


1.8 


1.6 


^  APPLIED  IIVMGE     Inc 

^^  1653   Ec       Mam    Street 

~«S  Rochester.   Ne»   York        14609       USA 

^S  (■"6)   '*82  -  OJOO  -  Phone 

5=  (716)   288  -  5989  -Fax 


626 


INDFX 


Bank — (Conlinufd) 

Iii.s])cction,  questions  on,  571-581-. 

Loaning  the  funds  of  a,  :2i8-ij8. 

Premises,  101-103. 

Profits,  8+, 

Returns  to  government  by.  39. 

Statement,  analysis  of  a,  80-111. 

Statements,  isJi. 

Stock,  regulation  of,  ■22-22. 

Act  of  1871,  6,  15-46. 

Last  revision  of,  7. 

Circulation  Redemption  Fund,  ^0, 
51. 

Kxaminations  in  the  United  States, 
17. 

Xofc  issue,  limit  of,  .50. 

Of  British  North  America,  branch- 
es of,  410. 

Of  Montreal,  branches  of,  409. 

Of  Nova  Scotia,  branches  of,  409. 
Banks 

As  partners  in  a  business,  99-100. 

Board  of  Directors  in,  ;21. 

Branch,  in  Canada,  22-2. 

Branch  system  of,  47-79. 

Business  and  powers  of,  33. 

By-laws  of,  2\. 

Canadian,  essentially  national,  11. 

Cash  reserves,  28. 

Deposits,  37. 

Dividends,  27. 

High  position  of,  in  Canada,  76. 

Incorporation  of,  19. 

Internal  inspection  of,  345-357. 

Kinds  of,  in  Canada,  9-14. 

Labor-saving  methods  in,  358-379. 

List  of,  under  Bank  Act,  18-19. 

Loans  and  securities  of,  34-36. 

Misdemeanors  of,  44. 

Note  issue  of,  u'8-31. 

Organization  of,  20. 

Rules  and  regulations  of,  353. 

Shareholders  in,  22. 

Special  reports  of,  27. 

Tables  of  circulation,  55. 

Their  treatment  of  customers  in 
Canada  and  the  United  States, 
72-73. 


"Banks     and     Banking,"    quo 

from,  1. 
"Banking  and  Commerce,"  quo 

from,  270-273. 
Banker's  commission  on  foreif 
change,  477. 
I^ondon  balance,  448. 
Long  bills,  438. 
Banking,    History    of,    in    Ci 
divided  into  four  periods. 
Practice,  113-413. 
Principles,  1-111. 
System,  national,  6. 
Banque  National,  branch  of,  41 
Batch  method  of  handling  worl 

365. 
Benefits 
To  exporter,  in  foreign  exc 

476. 
To  importer,  in  foreign  exc 
475. 
Berlin,  drafts  on.  429. 
Bill  of  lading,  definition  of,  31 
Bills  and  securities,  hypothecat 

275. 
Bills 
Of  exchange  involving  risk, 
Of  Exchange  Act,  412. 
Of  lading,  303. 
Payable,  how  listed,  46. 
Purchased,  record  of,  525. 
Receivable,  245. 
Register,  523. 

Sold  for  finance  purposes,  4 
The  security  back  of,  469-4'i 
Board  meetings,  114. 
Bonds,   issue   of,  by    Municip 

266. 
Books  needed  for  branch  oLici 

149. 
Bookkeeping 
Head  office,  122. 
Of  foreign  exchange,  521. 
Bordwell,  Mr.,  on  the  cost  of  < 

329. 
Borrower,  the.  68. 
And  the  branch  bank,  68. 
Questions  to  be  asked  of,  24! 


INDEX 


627 


Borrow  rr — (ConHniierl) 

Ht(Hiired  to  give  statements,  ;;33. 

Ability  to  dihtiiiguish,  i-2H. 
Horrowcr's  statements,  form  of,  :»38- 

-'t3.  ' 

Dnrrowing,  two  methods,  in  Canada, 

rn. 

Br.idstreet,  summary  of  failures  by, 

.'30--';{l. 
Briiiicli  Imnks,  74. 
And  panics,  74. 
Hooks  and  records,  147O0t. 
Clc.irings,  how  recorded,  KH. 
Clciring   statement,    1;J9-130,    171- 

I7t. 
I'.xprnses  of,  3-23. 
Foreign.  40tt. 
Insjiection  of,  3t5. 
Statistics  of,  67. 
Branch  staff,  the,  1.36-U6. 
Branch  system  of  hanks,  47-79. 

llllity  of  the.  64-b(i. 
B  (ckcnridge.   R.   M.,  on   the  Cana- 
<liaii    Bankers'   Association,  406. 
British  occupancy  of  Canada,  3. 
Buildings  for  hanks,  101-103. 
Business 
Aided  by  letters  of  credit,  480. 
i:xtcnsion.  danger  in,  336. 
Failures,  causes  of,  330. 
With  other  banks,  176. 
By-laws   which    may   be   passed    by 
banks,  21. 


Oible,  transfer  of  fimds  by,  U7-J4!). 
Call  loans  in  Canada,  and  elsewhere, 

W-92,  3,59. 
(all  money  basis  for  time  rates,  tJ5. 
Cniada 
Hanking   practice  in,    113-113. 
(all  loans  in,  90. 
Clearing  houses  in,  388. 
Failures  in,  compared  with  United 

States,  231, 
Four  historical  periods  of  banking 

in,  1. 
High  position  of  banks  in,  76. 


History  of  banking  in,  1-8. 
How  call  loans  are  made  in,  359. 
How  public  funds  are  handled  in, 

86. 
Imports   and   exports,    to    United 

States,  418. 
Inland  exchange  in,  415. 
Kinds  of  banks  in,  9-14. 
Large  number  of  branch  banks  in, 

67-68. 
Monctarj'  system  of,  47. 
Xumlier  of  branch  banks  in,  333. 
The  Bank  Act  of,  15-46. 
Two  government  banks  of,  11. 
"Canada  and  the  Empire,"  quotation 

from,  77. 
Canadian 

Bank  of  Commerce,  branches  of, 

409. 
Bankers'  Association,  the,  16. 
Audits  by,  16. 

Duties  of,  42.  * 

History  of,  404-406. 
Rules    governing    endorsements, 
567-570. 
Dollar,  value  of,  521. 
Exchange,  with  Austria-Hungary, 
534. 

With  France,  538-531. 
With  Germany,  532. 
With  Holland,  533. 
With    the   Scandinavian    Union, 
534. 
Canadian  quotations  converted  into 

. American,  587-592. 
Cannon.  .Tames  G.,  on  bank  credits, 

331.-236. 
Capital 

And  reserve,  analysis  of.  87-88. 
Lack  of.  in  Canada.  333. 
Stock,  changes  in,  22. 
Card  index  of  credits,  351. 
Cardinal  numbers,  table  of,  435. 
Cash 
And  securities,  audit  of,  347. 
And  sight  items,  analysis  of,  341- 

.342. 
How  handled,  169. 


628 


INDEX 


Cash— {Continued) 

Item  (UTount,  in  head  office,  131. 
Items,  forms  for,  338. 
On  hand,  239. 
Reserves,  28. 
Cash  Book,  the,  1.5.3-158. 
Special  forms  of,  1,50-1.58. 
Book  ledger,  in  hranch  office,  183- 
189. 
Cashing  checks,  221. 
Certification  of  checks,  223. 
Changes  in  the  Bank  .\ct,  16. 
Characteristics  of  a  horrower,  229. 
Charge  bank  voucher,  215. 
Charges  back  notification  blank,  214 
Check 
Lists,  167. 

Register,  for  foreign  accounts.  523. 
Checking  accounts,  .,mall,  318-322. 
Checks 

And  drafts,  lost,  398. 
'Care  in  accepting,  142. 
Cashing,  224. 
Certification  of,  223. 
Clearance  of,  324. 
Cost  data  on,  329. 
Methods  of  filing,  225. 
Paid  at  par,  340-343. 
Travelers',  544-552. 
Chief  accountant,  121. 
Chief  Inspector,  duties  of  the,  119. 
Chinese  money,  equivalents  of,  531. 
Circular  letter  of  credit,  555-556. 

Application  for.  462. 
Circular  notes,  557-561. 
Circulation,  87. 
Analysis  of,  87. 
Of  Canadian  banks,  55. 
Records,  127. 

Relation  of  the  branch  system  to, 
66. 
Cla.ssifica'tion  of  loans,  259-282. 
Clean  commercial  bills,  437. 
Clearing  houses  in  Canada,  388. 
Collateral 

Hypothecating,  260. 

Notes,  273. 

Register,  195. 


Collection 

Charges  on  cxclinnge,  32 
Clerk,  duties  of.  1 13. 
Register,  195-196. 
Collections,  hov>  handled,  31 
Commercial 
Banks,  9. 
Bills,  clean,  437. 
Commercial  credit 
Application  for,  461. 
Finance  illustrated,  467. 
Growth  of,  480. 
The  financing  of  exports. 
Commercial 
Letters,  many  kinds  of,  5t 
Long  bills,  433. 
Terms,  table  of,  4.j. 
Commission  on  foreign  loan; 

The  question  of,  504. 
Continental  exchange,  527-53 
Contingent  liabilities,  248. 
Contract  with  customers,  2!] 
Conversions  and  fluctuations 
Correspondence,  three  classe! 
Correspondents'  accounts,  52 
Correspondents'  ledgers,  123. 
Cost  accounting,  bank,  314-3 

Principles  of,  316. 
Cost 

Data  on  checks,  329. 
Of  drafts  to  purchasers,  54 
System,  need  of  a,  314. 
Counterfeit  notes,  32. 
Country  bank.s,  loans  by,  28: 
Credit,  229. 
A  definition  of,  229. 
Establishing,  71. 
Finance,    commercial,    illu 

467. 
Letter  of,  how  used,  467. 
Letters  of,  for  travelers,  55; 
Loaning  on,  in  exchange,  4j 
Man,  rules  which  should  gov 

237. 
Merchant  seller's,  446. 
The  science  of,  937. 
Credits,   commercial — The   fir 
of  exports,  463. 


INDEX 


629 


And  bank  issues,  57. 

Ami  issue  of  notes,  JS. 

MDving  of,  i~. 
I'lirri'iuy,  59. 

I'.uKTfteucy,  59. 

il.iiniltoii  oil,  3. 
Currt'iit 
I)<|iosit  ledfrer.  189-191, 
l.ialiilities,  J 17. 
Loans,  98. 

Season,  in  advanees,  308. 
Ciistouiers,  319, 
C'trtificution  of  accounts  of,  219. 
Contract  with,  292. 
How  recorded,  207, 
Out-of-town,  -M9. 
Pass-books  of,  217. 
Iteports  on,  382. 
Wills  of,  399. 

D 

Daily   routine   of   the  branch  office, 

137-139. 
I)t  nicrs,  advances  to,  285. 
Dealing  in  futures,  456. 
D(l)ts,  overdue,  100. 
Declaration   of   goods,  on   advances, 

293-295. 
Default  on  assignment,  309. 
Demand  exchange,  sale  of,  446. 
Denominations  of  notes,  49. 
Departments  in  a  bank,  300. 
Deposit  business,  the,  205-227. 
Deposit  slips,  217. 

Methods  of  filing,  225. 

Special,  366. 
Deposits,  37. 

Hank,  37. 

My  the  government,  86. 

Demand,  83. 

I'lsewlicrc,  85. 

Interest  on,  106. 

Payable  after  notice,  81. 

With  other  banks.  89. 
Depreciation 

On  bank  buildings,  102,  108. 

On  bills  of  exchange,  437. 


Description  of  goods,  in  assignment, 

288. 
Directors  of  banks,  21-22. 
Duties  of  the,  113-115. 
Discount 

Blotter,  160-162.. 
Clerk,  duties  of,  144. 
Diary.  163. 

Register,  for  branch  office,  158. 
Report  in  head  office,  131. 
Discrepancies  book,  200. 
Dissolution  of  a  bank,  39. 
Distribution  of  gold,  491-493. 
Dividend  register,  127. 
Dividends  of  banks,  27. 
Documentary  and  time  bills  register, 

523. 
Documentary  exchange,  value  of,  435. 
Dollar  credits,  501   et.  seq. 
Dominion  Bank,  branch  of,  410. 
Doubtful  paper,  280. 
Drafts,  281. 
Discounting,  281. 
Drawn  against  securities,  439. 
Drawn  by  bankers,  438. 
Drawn  on  the  importer,  504. 
Principles  underlying  the  issuance 

of,  539. 
Register  of,  165-166,  525. 
Sold  against  remittances,  449. 
Specimen,  540. 

\'ersus  travelers'  checks,  544. 
Due  to  banks,  items  in  statement,  85. 
Dunbar,  Charles  F.,  defines  a  bank,  9. 

On  elasticity  of  currency,  53. 
Duplication  of  entries,  how  avoided, 

359. 
Duplicate  pass-books,  226. 


"Economics  of  Business,"  quotation 

from.  10. 
Education  of  employees,  401-403. 
Efficiency  methods  in  banks,  358. 
Elasticity  of  notes,  52. 


<»;{o 


INDEX 


"l-;irnir„ts     „f     FoniKi.     Kxchange, 
'In,"  quoted,  4,i(;. 

J>nj)loyee.s,  educdtion  of.  401-tOU. 

Kiulorsements,  rules  reN|)eitinK.  Ml- 
oTO. 

Knglish  money,  its  equivalent  in  Ca- 

nadiun.  jlJ. 
Exchange,  jll. 

Advance  money  on,  jll. 

And  imports,  463-481. 

Arbitraging  in,  4jH. 

Asiatif,  534. 

Between  France  and  Canada,  how 

reckoned,  5iS-331. 
Bills  of,  involving  risk,  430. 
Charge  on,  3:^5. 
Continental,  5^7-537. 
Documentary,  4;«. 
Foreign,  415-566. 

Foreign,  and  the  international  se- 
curity market,  48^-490. 
Foreign,  influences  affecting.  49{. 

How  it  is  quoted,  4:^8. 

Inland,  3^4,  415. 

Interest  on,  how  figured,  515. 

Market,  mechanism  of  the,  415-445. 

Xon-commercial,  538. 

Purchase  of,  454. 

Quotations    between    Canada    and' 

the  United  States,  587-59i. 
Rate  of,  37,  419,  489.  513. 
Received,  in  accounts,  336. 
Risk  of,  453. 
Sterling,  51:?-526. 
Sterling,  features  of,  518-531. 
Underlying  principles  of,  430. 
Executor,  power  of,  248. 
Expense  account,  items  in,  383. 
Expenses  of  branch  banks,  3J2. 
Export  letters  of  credit,  506. 
Export  trade,  in  connection  with  for- 
eign exchange,  500-511. 
Exporter,  the,  476. 

Benefits   to.   in    foreign   exchange, 

How  he  obtains  remittances,  503. 


Exports 

And  imports,  the  financii 
Financing,    |)y    „H.a„s 

<Tedits,  501   et  seq. 
.Merchandise,  influence  of, 

change,  493. 
i'o  United  States,  418. 


Failure  in  business,  causes  ( 
Farmer,  definition  of,  3U'. 
Farmers,  loans  to,  i>67. 
Farmer's  statement  of  affaii 
Fiat  money,  experiment  in. 
Finance  bills,  44:3-445. 
Financial   statement   in   hea 
131. 

Financing  exports  by  means 

lar  credits,  501  et  seq. 
Fish  products  defined,  312. 
Fluctuation  in  loans,  69. 
Foreign 

Branches,  406-410. 
Coins,  values  of,  527-537. 
Drafts,  stamp  duties  on,  58, 
Loans,  commission  on,  454. 
Foreign  Exchange,  415-566. 
And  imports,  463-481. 
And     the    international     s 

market,  482-490. 
Banker's  conmnssion  on,  47' 
Bookkeeping,  521. 
Definition  of,  421. 
How  money  is  made  in,  446 
Influences  affecting,  493-495, 
Operations  in  connection  wi 
port  trade,  500-511. 
Foreign  money 
Loaned  by  long  bills,  439-44S 
On  joint  account,  451. 
Orders,  561-5G3. 
Remittance,  538-566. 
Tables  of,  535-536. 
A'alues  of,  based  on  mint  pai 
Forest,  products  of  the,  deflnec 
Form  of  statement  by  borrower 
243. 


INDEX 


631 


France,                                 » 

B  financing  of,  uu 

C'unadian  exchange  with,  538-531. 

"H-ans    of    dollar 

Eurly    financial    agreement    with 

.seq. 

Canada,  2. 

uence  of,  upon  ex- 

Stamp  duties  in,  586. 

Fraud,  guarding  against,  232. 

i,  418. 

i  ret-  Baniiing  .Act,  I. 

1 

Futures,  dealing  in,  456. 

causes  of,  330, 

'f,  MJ. 

G 

207. 

of  affairs,  Sji. 

Uardin,  John,  on  finance  bills,  444. 

nent  in,  2. 

General  ledger 

15. 

111  branch  office,  181. 

t   in    head   office, 

Of  the  head  office.  133. 

Uetierul  manager,  duties  of,  115-117. 

•y  means  of  dol- 

(ieiieral  statement  books,  197. 

et  seq. 

Clerinany 

■d,  313. 

Canadian  exchange  with,  533-533. 

,  69. 

Stanip  duties  in,  586. 

Gilbart,  quoted  on  banking.  It). 

Gold.  497. 

27-537. 

Cost  of  buying  and  shipping,  497. 

es  on,  S85-58U. 

-Methods  of  moving,  496-498. 

on,  454. 

Profits  on  shipments  of,  498. 

15-566. 

Iteserves,  29,  48,  61,  96. 

81. 

The  production  of  491. 

tional     security 

The  movement  of,  491-499. 

Gold  or  specie  points,  in  exchange. 

n  on,  477. 

436-428. 

Gold,  standard,  almost  universal,  433. 

Goods. 

e  in,  446-460. 

Assignment  of,  287-393. 

.  493-495. 

Declaration  of,  on  advances,  393- 

ection  with  ex- 

395. 

1. 

Subslitution  of,  303-308. 

Wares    and    merchandise    defined. 

!,  439-442. 

313. 

>I. 

tlovernment 

Funds,  handling  of.  by  banks,  86. 

Savings  bank,  11. 
('•rain,  definition  of,  313. 
Great  Britain,  stamp  duties  in,  585. 
Gross  profits  how  determined,  110. 
(irowth  of  commercial  credit,  480. 
Guarantee  bonds,  389-390. 


open 


H 

Hague,  George 
On   loans  to  Manufacturers,  270- 

37.3. 
On  the  duties  of  the  general  man- 
ager, 115. 
Hamilton,     .Alexander,     report     on 

Banking,  3. 
Head  office,  the,  113-121. 
Entries,  176. 
Records  133-135. 
High  money  rates,  influence  of,  upon 

exchange,  494. 
Historical  sketch  of  banking  in  Can- 
ada, 1-8. 
Holland,   Canadian    exchange   with, 

533. 
Husband's     authorization     to 

bank  account,  311. 
1  lypothecation,  375. 
Of  bills  and  securities,  275. 
Of  collateral,  360. 
Of  notes,  374. 
Of  warehouse  receipts,  303. 


Identification  of  check-holders,  225. 
Importer,  the,  475. 

Benefits  to,   in    foreign   exchange, 
475. 

Drafts  direct  on,  504. 
Imports 

-And  exports,  the  financing  of,  46S. 

Foreign  exchange  and,  463-481. 

From  United  States,  418. 
Incompetence,  a  cause  of  failure,  232. 
Incorporation  of  banks,  19. 
Inexperience,  a  cause  of  failure,  232. 
Influence  of  banks  upon  business,  75. 
Inland  exchange,  324. 

In  Canada,  415. 

In  the  United  States,  417. 
Insolvency,  rule  governing,  42. 
Inspection 

Internal,  of  banks,  345-357. 

Liability  return,  351. 

Of  banks,  questions  on,  571-581. 


632 


INDEX 


Inspector,  bank,  duties  of.  344. 
Insurance,  245. 
Ample,  should  |je  carried,  245. 
Items  of,  384-387. 
On  goods  under  assignment,  295. 
Interest,  448. 
On  cable  transfers,  448. 
On  call  loans,  93. 
On    deposits,    rate    of.    should    be 

steady,  lOtf. 
On  exchange,  how  figured.  515. 
On    long-time    foreign    exchange, 
510. 

On  savings  accounts,  237. 
On  time  deposits,  82. 
Rate  of,  during  financial  stress,  70. 
Hate  of,  in  government  banks.  12. 
Rates  of,  on  loans,  37. 
Tables,  328,  516-518. 
Internal  inspection  of  banks,  345-357. 
International  arbitraging,  486. 
"International  Exchange,"  quotation 

from,  436. 
International 
Security  dealings,  three  classes  of, 

482. 
Security  market,  the,  482-490. 
Speculations,  484. 
Trading  in  securities,  influence  of, 
upon  exchange,  495. 
Interpretation    of   terms    in    assign- 
ments. 31 1-313. 
Investments,  knowledge  of,  a  neces- 
sity, 483. 
Issuance  of  drafts,  principles  under- 
lying the,  539. 


Japanese  money,  equivalents  of,  537. 
Joint  account,  loaning  foreign  money 

on,  451. 
Joint  accounts,  208. 
Joint  stork  companies,  208. 

Stock  comjianies,  loans  to.  2C1-265. 
Junior,  duties  of  the,  145. 


Labor-saving  methods,  348 
Lawson,  W.  H.,  on  "Bankir 

ada,"  77. 
Ledger-keeper,  in   the  brai 

142. 
Ledger,  rules  for  keeping,  ; 
Ledgers,  audit  of,  318. 
Leroy-Hoileau,  quoted  on  b: 
Letter  of  advice,  how  drawi 
Letter  of   indication,    for 

checks,  548. 
Letters  of  credit,  480. 
As  an  aid  to  business,  48 
Export,  506-509. 
For  travelers,  552-557. 
How  listed,  46. 
How  used,  467. 
S])ecimen.  464. 
Letters  received  register,  IS 
Liability 
Ledger.  192-194. 
Record,  253. 
Return,  inspection,  35L 
Liabilities 
Contingent.  248. 
Current.  247. 
Lien  notes,  274. 
Limitations   to   finance  pap« 

444. 
Liquidation  of  advances,  309. 
Loan  companies,  12-14. 
Loaning 
.\   bank's   money,  228-258. 
Foreign  money  on  joint  « 

451. 
On  credit,  452. 
Loans,  35. 
Bank.  35. 
Call.  90-92.  259. 
Classification  of,  259-282. 
Conuuission  on,  454. 
Current,  98. 

Distinguished  from  overdraf 
Foreign.  92. 

Reasons  for  granting,  254. 
To  fanners,  267. 


INDEX 


033 


IPC  paper  issue, 


I  oaM>—  ( Con  tinutd) 
Tu  juiiit  stock  companies,  36l-26i. 
I'o  inunufacturers  and  merchants, 

■270. 
I'o  municipalities,  -266. 
To  professional  men,  366. 
To  retail  merchants,  -269. 
Vuiunir  of,  69. 
I.undon 
Uanltrr's  balance  in,  418. 
Branch  bunks  in,  407. 
Drafts  on,  428. 
Letters  of  credit  on,  468. 
Quotations  for  American  exchange, 

592-593. 
The  center   of    gold    distribution, 

491. 
Why  credit  is  issued  on,  509. 
J.ong  bills,  various  kinds  of,  438-442. 
i.oose-leaf  accounting,  151. 
Losses  on  loans  due  to  ca ; dessness, 

:{I0. 
Lost  and  destroyed  notes,  63. 
Loxt  checks  and  drafts,  398. 
Lost  travelers*  checks,  551. 
Low  money,  as  a  factor  in  exchange, 
494. 

M 

.Machine  statements  of  accounts,  375. 
.Machinery  and  fixtures,  in  a  state- 
ment, 240. 
.Mail  remittances,  563-566. 
-Manager,  branch,  duties  of  the,  136- 

139. 
.Manager,  qualifications  of,  for  loans, 

228. 
Manufacturer,  definition  of,  312. 
.Manufacturers,  loans  to,  270-273. 
.Manufacturing    business,    statement 

of,  244. 
.Margin  maintained  on  advances,  298. 
Margraff,  A.  W.,  on  bills  of  exchange, 

436. 
Market,  exchange,  mechanism  of  the, 

415-445. 
Market  influences  on  exchange  rates, 

489. 


Maturing    investments,    replacement 

of,  483. 
Meade.  E.  S.,  on  banking,  10. 
Merchandise 
Analysis  of,  239. 

Exports,    influence    of.    upon   ex- 
change, 493. 
Merchant  seller's  credit,  446. 
Merchants 

Loans  to,  270-27.3, 
Bank  of  Canada,  branches  of,  409. 
Mint  pur,  in  exchange,  422. 
Misdemeanors  of  banks,  44. 
Monetary  system  of  Canada,  47. 
Monetary  values,  423-426,  527-537. 
"Money    and     Banking."    quotation 

from,  10. 
Money 

How   made   in    foreign   exchange, 

446-460. 
Information  necessary  in  lending, 

229. 
Parcels,  395. 
Rates,  time,  455. 

Received  after  banking  hours,  217. 
Orders,  foreign,  561-563. 
Monthly    liability    return,    in    head 

ofBce,  132. 
Monthly  variations  in  circulation,  58. 
Montreal 
Rate  of  exchange  with  New  York, 

419. 
Bank  of,  founding  of,  4. 
Mortgages,  in  statements,  247-248. 
Movement  of  gold,  the,  491-499. 
Municipalities,  loans  to,  265. 
Murray,  Sir  George  H.,  on  banking 

costs,  330. 
Murray,  Lawrence  O.,  on  overdrafts, 
279. 

N 

National  banking  system,  6. 
Ket  profit,  how  determined,  108. 
New  accounts 

Opening  of,  142. 

Safeguards  in  opening,  205. 
New  France,  banking  history  in,  3. 


634 


INDEX 


I 


New  York 
A  center  of  exchange,  413. 
An  international  money  market,  93. 
Branch  banks  in,  4U7. 
Call  loans  in,  91. 
Funds  in  Canada,  418. 
Varying   rates  of  exchange  with, 
417. 
"New  York  Financier"  quoted  on  ar- 

bitraging,  lAtf. 
Non-commercial  exchange,  i38. 
.Note  issues  and  the  branch  system, 

47-79. 
Note  issues  in  the  British  Colonics, 

■29. 
Notes 
Amount  of,  in  1913,  48-49. 
And  checks  of  other  banks,  89. 
Circular,  557-5til. 
Circulation  of,  ^28. 
Collateral,  373. 
Counterfeit,  32. 
Dominion,  49. 
Elasticity  of,  52. 
Hypothecating,  274. 
Lost  and  destroyed,  63. 
Outstanding  in  the  United  States, 

64. 
Payment  of,  31. 
Pledge  of,  30. 
Renewals  of,  377. 
Seasonal  fluctuations  of,  53-54. 
Used  for  assignment,  296. 
Notice  to  warehouseman,  304-305. 
Numerical  transit  system,  368. 


O 


Opening  accounts,  how  done,  205. 
Operating  expenses  a  source  of  loss, 

315. 
Organization  of  banks,  20. 
Overdraft  register,  198. 
Overdrafts. 

Guarding  against,  223. 

Not  the  right  class  of  loans,  278. 
Overdue  bills,  in  head  office,  132. 


Panics,  effect  of,  upon  brui 

74. 
Pu|)er,  safeguarding  of,  23 
Paris,  drafts  on,  429. 
Par  payment  of  checks,  3t 
Partners,  signatures  of,  39^ 
Partnership  accounts,  207. 
Partnership,  conversion  of. 
Partnership,  non-trading,  fi 
Pass-book 

Certificate,  220. 

Heceipt,  221. 

Savings  bank,  226. 

Use  of,  217,  378. 
Pass-books,  duplicate,  226. 
Past  due  bills  register,  198. 
Payment,  stopping,  398. 
Penalties  for  default,  310. 
Penalties  for  violating  the  I 
43. 

Percentage  Bank  of  Cana< 

ment  of  the,  79. 
Percentages  of  failures,  231 
Postal  Savings  Bunk,  11. 
Power  of  attorney,  391-395. 
Pownall,  George  H.,  quoted 

profits,  84. 

President,  position  of,  in  b 
Principles  of  cost  accountin 
Produce  book,  198. 
Production  of  gold,  the,  491 
Professional  men,  loans  to,  2 
Profit  and  loss  statement,  10 
Profits 

Gradual  decrease  in  net,  1 

In  arbitraging,  488. 

In  banks,  Pownall  on,  H4. 

Made   from   the   purchasi 
change,  454-455. 
Pro  forma  stationery  book,  9 
Promise  to  give  receipts  not 

ity,  286,  291. 

Promissory  note,  forms  of. 
Protest,  waiver  of,  213. 
Provincial  banking,  4. 


INDEX 


635 


pon  branch  banki, 


if  Canada,  sUt^ 


I  rouNcial  Note  Act,  4. 
I'uiictuulity,  drsirubility  uf,  137. 


(,>ui'l)tr,  tint  hunk  in,  4. 

(^ti>  >ti()ii  ul'  cuinmiii.tion,  thr,  504. 

t^ui'^liunt  wliic-ti  should  btr  u!>k«d  of  a 

Ijorrower,  -'49--'50. 
(^uiik  ussfls.  J'M, 

R 

Hiitf  of  rxchungc,  how  made,  513. 
Kaw  iiiatrriuls,  in  u  ittutenient,  Hi. 
Kfal  estate 

\-<  an  asset,  2i6. 
As  stciirity  for  loans,  101. 
KcaMms  for  grunting  u  loun,  i'3t. 
Kcitipfs  and  assignments,  udvunoes 

1)11,  .'8U-313. 
Kicords 
Of  routine  work,  134. 
Of  tlie  head  office,  123-135. 
Itrilcriiption 
At  pur,  of  notes,  31. 
I'lmd  for  liank  paper,  30. 
Of  travelers'  checks,  547. 
Itrfusal  of  certificate  to  banks,  21. 
Urinittunce 
Hook,  170-172. 
i'orei|rn,  538-560. 
ilciiiittances 
Hy  mail,  563-566. 

Of    sixty-day    bills,     drafts    sold 
against,  449. 
Id  newals  of  advances,  309. 
Kenewuls  of  notes,  277. 
liftital  of  property,  346. 
Heplacement     of    maturing    invest- 
ments, 48.3. 
Heports  on  customers,  382. 
Kfserve     fund,     the,    a    margin    of 

safety,  109. 
Hescrves,    percentage    of,   to   assets, 

»5-96. 
Kestricted  letters  of  credit.  557. 
Retail  merchants,  loans  to,  2G9. 
Upturns  to  government,  by  bank,  39. 


Heturns  to  head  office,  139. 

Hisk  taken  on  foreign  exchange,  477. 

Koutine  work,  butch  method  of  han- 
dling, :i63-:ui5. 

Hoyal  Bunk  of  Canada,  branches  of, 
410. 

Itules  and  regulations  of  banks,  353. 

Kules  of  credit,  237. 


ex- 


Safes  and  vaults,  396. 
Sale  of  demand  exchange,  440. 
Savings  accounts 
Interest  on,  227. 
Small,  321. 
Savings  bank  department,  925. 
Savings  bank  ledger,  191-192. 
.Savings  hanks,  function  of,  11. 
S<-undinavian    Union,   Canadian 

chunge  with,  534. 
Schedule  of  rates  on  cash  items,  338 
Science  of  credit,  the,  237. 
Seasonal  fluctuations  of  notes,  53-54 
Secrecy  in  transctions,  400. 
.Secretary,  duties  of  the,  120. 
Securities. 
Analysis  of,  90. 
Drafts  drawn  against,  438. 
Hypothecation  of,  275. 
Of  trust  companies,  13. 
Security 

Back  of  bills  of  exchange,  469-470. 
Dealings,  international,  three  class- 
es of,  482. 
Different  kinds  of,  34. 
Distinguished  from  a  promise,  286. 
Margin  of,  259. 

Market,  the  international,  482-490. 
To  note  holder,  51. 
Selling  futures  against  futures,  456- 

457. 
Shareholder's  audit,  16,  26. 
.Shareholders  in  bunks,  22. 
.Shares 

And  calls  of  bank  stock,  23. 
Transfer  of,  in  hanks,  23. 
Shippers,  advances  to,  285. 
Sight  drafts,  exchange  on.  438. 


G.')6 


INDEX 


Signatures 

Of  customPDt.  i07. 

Of  partners  'Ml. 
Signing  of  l)iiu  |,v  |,„nk,,  31, 
Silver   stunUurd.    where   niuintained. 

ii'X 

Siimlj  urc'otint!) 
Cost  of.  ,n  j. 
Increase  of,  :n8. 
Sovereign  U,.i,|<.  fallurr  of.  OS. 
Spanish  mill  dollars,  A. 
Special 
Deposit  slips,  ;Wo-. 
Hegisters,  in  branch  office,  JOO-MH 
Specie  and  notes,  analysis  of.  HH 
Specimen   forms  and  signatures  for 

i'orrespondei.ts,  54;J. 
Siwciilations.  international,   tHl. 
Staff  reports,  3j»-:WT. 
Stamp  .luties  on  foreign  drafts.  .WJ. 
M(}, 

Statement  by  borrower,  form  of.  j-.m- 

statement  of  affairs,  required  of  bor- 

rowers.  i>33. 
Statements. 
Annual  and  s))ecial,  24, 
Changes  in.  44. 
Made  on  machines.  375. 
Of  borrowers,  why  necessary.  335 
Statistical  books  at  the  head  olBce, 

1*4. 
Sterling  exchange.  513-526. 

Features  of,  518-531. 
Stock  booVs 
How  used.  134. 
Certifu-ates.  register  of.  127. 
Ledger,  form  of,  I3(i. 
Stop  payment  notice.  3<)8. 
Substitution  agreement,  307. 
Substitution  of  goods,  303-308 
Suminary  of  the  Bank  Act  of  1913, 

Sundries,  audit  of.  3|0. 
Sundry  returns,  in  bend  office    13^ 
Su,)erintendent    of    branches,'  duVies 
of.  118. 

Susj)ensioii,  rule  governing,  42, 


Telegrams,  how  handled, 
'l>ller.  tlie.  in  the  branch  ( 
'I'eller's  records,  I7H-18I. 
•riK-ory   an<l    History  01 

•piolation  from,  9. 
'1  homas,  F.  \V.,  y„  „,^.  ^.„^ 

339. 
'J'imc    money    rales    on    t 

l»asis,  455. 
Toronto,  rate  of  exchange 

Vork,   H<J. 
Trade 

Hills,   general    use   of,   7 

Hills  n-mitted  diary,  103 

Volume  of  with  L'nit  d  S 

Transfer  biM>ks  for  stwk,  I 

Transfer  of  funds.  .334,  447 

Tra"si«  numbers  in  Canada, 

'rra\  elers"  checks,  544-553. 

Treasury  cash,  in  branch  offl 

Trust  and  loan  companies,  1 

Trust  receipts,  471-475. 

U 

Union   Bank  of  Canada,  br 
410. 


Value  of  early  news  in  arbi 

487. 
Values 

Of  coins  of  various  countri 

430. 
Of  foreign  coins.  537-537. 
Of  foreign  money  based  0 
par.  437. 
Vaults  and  safes,  39C, 


w 


Wage-earners,  rights  of,  293. 
Waiver  and  authority  to  charg 

items,  210. 
Waiver  of  protest,  213. 


nada,  branch  of, 


f  countries,  433- 


IXDEX 


6d'i 


Walltrr,  Sir  F.ciinund 

On  liHiikiiii:,  H. 

Oil  i'hII  Iiihiis,  01. 
WHrilioiiM-iiiiin,  noticF  to,  '.VH-'Mj. 
Warrlioiisc  rwript.s 

And    ii^igiiincnts,    udviinccs    on, 
>:i-;n:i. 

|)i  liiiltion  of.  'M-J. 

loiiiis  of,  :«l|. 

IImm  ii.Ncd,  30.», 


IlypnttMTiitinn  of,  303. 
Weekly  report  on  l)UNlneft!i,  In  head 
offliT,  i;u-i:h. 

White,  llorHce 
Defliirt*  n  linnk.  10. 
(jiioteil  in  ".Money  and  Ranking," 

Wliolesiile    nierclinnts    advances    to, 

.'8.). 
Women,  married,  accounts  with,  iOM. 


